Rogue waves can be defined in many ways, yet the one I prefer is "a wave of extreme severity that appears unexpected even to an expert". Given that definition, rogue waves do exist, yet there is no evidence that they would be globally more frequent than conventional (non-linear) waves theories predict, they just don't happen where and when — i.e. in the most extreme sea states — one would expect them. There is no evidence either that the "modulational instability" theory that my colleague Prof. Akhmediev puts forward to explain them would not apply: the theory was validated in wave tanks, optical fibers and plasmas. It is just impossible to know whether the necessary boundary conditions are satisfied in nature. Several points may be noteworthy to the Specs:
1. A recent article shows that rogue events can be empirically predictable, but that for ocean waves the delay would be of the order of the time needed to shout "Buddies, grab something and hold on to it!"
2. "Normal" extremes are at least as frequent as "special" ones, and all indicators based on breather theories such as Akhmediev's have false alarm rates of at least 90%, perhaps 99%, and still fail to warn of about 10% of actual rogue waves.
3. Experienced sailors deny having met "rogue waves". They say that they encountered waves that were rogue, they capsized or broke some ribs (Roger Taylor, Isabelle Autissier), but when you discuss it directly with them, nothing that they were not expecting and had not prepared their ship for.
4. Only a very small percentage of fatalities occur well off the coast (Nikolkina & Didenkulova), most of them happen at the coast or in shallow waters where victims feel wrongly on safe ground or in safe waters.
William Weaver comments:
Your fourth point is similar to many car accidents happening within a small area from home. People make more mistakes when they feel comfortable. I'm not sure how this changes when accounting for activity though. For example, you could normalize accidents per mile driven and then compare close to home versus far from home, or do a similar normalization for the study mentioned with at sea fatalities, which I have not read. It might be helpful to measure after splitting into bins for types of vessel (cargo ships might have more miles, farther from home travel and less fatalities), and by type of mariner, which might be self defeating as it is more likely less experienced seamen would stay close to shore ( which is not the case for drivers staying close to home).
It seems like a data set prone to torture someone. But do we make more mistakes when we feel safe? The opposite might be true too. My observation is the difference between good and great traders is often the number of mistakes they make. Bring back the checklist posts?
Jeff Rollert writes:
I see some sample issues. Most sailors (N) do not venture more than 20 miles from the coast. The ones that do are orders of magnitude better prepared (boat) with experienced crew. So I suggest the distribution is bimodal.
Also, there is more than one kind of "rogue" wave. One is an overtaking wave, which is when two waves combine; the second, and more deadly, is when the wave comes from a direction that is unexpected. In my experience, these are the most deadly, as they roll (or broach) the boat. They are also the hardest on the structure of the boat and hit the weakest points harder (deck access from the stern, control or bridge room windows and electrical systems). For fisherman, they dread losing engine power, as the boat becomes exposed in the same way, as fishing boats have the windage at the bow, which turns the boat and presents a breaking wave to the stern.
Lastly, looking at single vs combined storm fronts also messes with their structure.
IMHO, they oversimplified their model.
Jim Sogi writes:
Surfers expect at least 1 wave each day that will be 3-5x the smallest wave. It's called the wave of the day. In a random sequence this would be one of the far tails. They tend to come with the incoming tide as there is an extra push from the moon.
I think the rogue waves in the ocean might be 20x or more if there were a number of storms with crossing wave trains which could combine. It's the cross chop that creates these large events through random combinations. Rogue is often and mistakenly used as unexpected. Sailing through large parallel swells on a calm surface is quite easy. Sailing through a cross chop is very tiring and rough. Refraction and reflection from shores often make coastal sailing rougher than in the mid ocean.
What always surprises me is how calm the ocean tends to be. You would think it would be rougher given how big it is.
I have been wondering, is there any strategy for slots? I know there is a lot of strategy for blackjack and other casino games that is applicable to trading but I've never really read about/considered slots. My quick online searches returned nothing very scientific. I assume slots have a routine (low) payout ratio. I wonder how random the results are (the conspiracy theorist in me is highly skeptical, especially of video slots).
It seems the time to play would be after a string of losses as the payouts do need to come. Sort of like counting in blackjack, you could watch other players on machines, wait for them to lose a lot and potentially assume the odds were going up. It also seems (much like old horse racers) the best recipe would be to bet a consistent amount. Watching players I see bet sizes swinging all over and a lot of loss. Usually it is bet big, lose, reduce size, win, up size, lose, repeat until broke.
Bets could vary but only as a constant function of capital (I.e. 1 with 10 in capital, 2 with 20, etc). This would be subject to casino limits but would probably beat changing size due to martingale risk. I also figure different machines would have different odds. Best to play the machines with the highest odds. The scratch lotto for example publishes the odds of their games in ny, I imagine one could find similar publications with slot odds.
Next I wonder how stop losses could be tied in. Would it be best to use a set number of losses to move to the next machine. When playing with house money should you let it ride or use a rolling stop. Rolling stop sounds better. Also if you had a big win it stands to reason that machine was not going to be paying out big soon so you should cash in and move on.
This all may be virtually impossible too unless there were teams working in shifts (people have to sleep) but casinos don't.
Welcome any thoughts or ideas. I know slots aren't sexy like table games but the anonymity and lack of fellow players makes them fun at times (but it would be more fun to walk away up money).
Will Weaver writes:
If slots are random they don't have a 'quota' of payouts… and as in flipping a coin, every iteration holds the same probability. So there shouldn't be any advantage. But I know nothing about the machines other than they probably are not completely random, though closer than would generate an edge.
Sam Marx writes:
If they are electronic slots, I believe they use some sort of random number generator. So I've had the theory that if there was some way to determine the formula used, then they might be beaten.
Craig Mee writes:
Watching the payout numbers on a screen a long time ago when a technician was working on one– this was a poker slot– showed the payout to be approx 80% before double up, and after double up it went down to the low 60% if memory serves me correctly. When playing I took the strategy of banking all my small wins due to this, and doubled up on any large wins i.e 4 of a kind and the like. From there I would work a stop at flat after doubling the stake (if I won my doubles) and then a trailing 20% stop of total win one tripled my initial stake. It seems to let you have a plan, and walk away, rather than the guy next to you, tipping money into that feeder all night. If you must play, then having a plan of attack is the most important aspect, so you bank or your stop goes off …quickly…and you're out of there.
Jeff Watson writes:
There s one great slot strategy that hasn't been touched on. The best way to win at slots is to not play at all. Even the places that offer 98% payouts. What they are really saying is that for every $100 you feed through the machine, you will get 98 dollars back. The vig is too tough for me, or any other sensible person, for that matter. One has noticed that the really easiest games of chance usually have the highest vig. Things like wheel of fortune, chuck-a-luck, slots, and keno all have outrageous vig and should be played by no one. Save your money and go to a great show.
Pitt T. Maner III writes:
Along the lines of the slots thread, here is some info about roulette strategy:
1) Under normal conditions, according to the researchers, the anticipated return on a random roulette bet is -2.7 percent. By applying their calculations to a casino-grade roulette wheel and using a simple clicker device, the researchers were able to achieve an average return of 18 percent, well above what would be expected from a random bet.
2) "There have been several popular reports of various groups exploiting the deterministic nature of the game of roulette for profit. Moreover, through its history the inherent determinism in the game of roulette has attracted the attention of many luminaries of chaos theory. In this paper we provide a short review of that history and then set out to determine to what extent that determinism can really be exploited for profit."
Chris Cooper writes:
The most obvious and effective countermeasure is to disallow betting after the ball is released. The casinos allow betting after release because customers like it, but if they have any doubt it is a simple matter to change that practice.
Secondly, Thorp's original work (and mine) were based on finding wheels which were not quite level. After he hit a few casinos successfully, he found that the number of out-of-level wheels decreased. The paper cited in the original post details an approach for level wheels, but notes that more accurate timing is required.
Plus eV roulette did make it to book form, if not the front pages, by a group from Santa Cruz. More recently, a Hungarian was purportedly successful to the tune of over one million. My paper many years ago is lost to the ages, but in any case you can learn much more by reading the paper cited in Mr. Maner's post.
October 1, 2012 | Leave a Comment
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:
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
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:
-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.
The market if touched would seem to be an exact replica of the spider's attacking when the thread is tripped. The brokers have a variant of that called a "ghost order" that is not on the books anywhere but is triggered whenever a bid or offer hits the price electronically that maintains the privacy of the spider's plan.
Gibbons Burke writes:
In the days of the dinosaur, when physical pit trading reigned supreme, the would-be spiders with resting M.I.T. orders could be gauged by the size of the deck of order tickets held in big-fish client's brokers hands. The hunting raids mounted by locals called "gunning for the stops" often caused the would-be predators to become prey.
This game is now being played by the new locals (co-locals?) - the HFT bots at the speed of light.
Speaking of the speed of light, and a different order of M.I.T., some smart fellows there have created a camera which is so fast (a trillion frames per second) it can take a movie of a packet of photons - a laser light bullet a millimeter in length - traveling through a soft drink bottle:
Here is a nice TED talk from Ramesh Raskar on "imaging at a trillion frames per second".
Victor Niederhoffer writes:
One believes that a buy market if touched order rests below the current price. And a sell market if touched order rests above the current price but the spirit of taking advantage of the weak is the same.
Jeff Watson writes:
Furthermore, MIT orders, buy stops, sell stops, GTC orders, etc if held at the exchange or their servers become part of the market and are served to the inside players as delectable morsels to snack on.
William Weaver writes:
Even orders that are held on a broker server can be seen by others within that brokerage… I was exploring Bberg the other day and found a function that allowed me to see what other orders rested within the firm. I've been keeping orders personal server, or CPU side for a while, but after that discovery I've become even more paranoid (not that I am a big enough player to get attention, but sometimes it seems like it is statistically improbable for prices to all but reach my take profit only to reverse and get almost to negative where I exit flat).
Anatoly Veltman writes:
Just to remind us, today's slippage on filled orders is only one tick, or even half-tick. It is the slippage on unabled limit orders that's a real killer. In the previous discussion of how HST effects long-term investors, who are "forced" to wait in queue for execution…yes, the sheer volume of short-term predatory activity, which occupies certain time on exchange server, and could go awry - could spill into a more illogical (random) near-term direction. Long-term is a series of short-terms to a degree - and all this short-term activity may be adding to randomness. This is liable to confuse the heck out of longer-term thinker and leave him entirely outside of the trade: we hear more and more how this or that traditional indicator has become a victim of fake-outs.
It was interesting to see that long term fixed income was down the most in 16 years as of gmt 1430 on Friday from the previous day's close. The move up in stocks from Tues at gmt 1430 to Friday's close was also the highest in 16 years. What a change in the guard this 10 percentage pointer represents. And how typical of summer markets. One takes the hat off to the Europeans and any fellow travelers who were able to orchestrate such a move for their sheer ability to gain such a mechanical advantage with such seeming small strides and words.
William Weaver writes:
It was fun to watch many dividend ETFs/ETNs (especially internationals) on Friday spike to large premiums over NAV. It was frustrating to find few locates. Larger players were so anxious to lock in higher interest rates in any way possible that they were willing to pay up almost 2% on some issues for fear that waiting for creation on close might lose them points in the underlying.
January 31, 2012 | 2 Comments
Let's play a little game — it's called “Baron Rothschild” — who once said “I made my fortune by selling too early” (a comment also made by Bernard Baruch)… Suppose that the dealer lays cards down, one after another. Each is an annual market return. At any time, you can call out “Baron Rothschild” and go to a defensive position, or you can gamble and get the entire market return the dealer shows next. The gain cards read, say, 15%, 20%, 25% and 30%. If you're defensive, you lag the market by 10% when the market return is a gain, but you get, say, 5% if the market return is a loss. There is one -20% loss card. Once it appears, the game ends and everyone counts their dough, compounded. It turns out that if the loss comes anytime before the 5th card, you're almost always ensured to beat or tie the dealer by immediately blurting out “Baron Rothschild” even before the first card is shown. For example,
20%, 20%, 20%, 5% beats 30%, 30%, 30%, -20%
15%, 15%, 15%, 5% beats 25%, 25%, 25%, -20%
20%, 10%, 5%, 5% beats 30%, 20%, 15%, -20%
5%, 5%, 5%, 5% ties 15%, 15%, 15%, -20%
You can easily prove to yourself that even for a six-year market cycle, you still generally win even if you call out “Baron Rothschild” after year two. It just doesn't pay to risk the big loss. The point of this isn't that investors should always take a defensive stance — some market conditions are associated with very strong return/risk profiles that warrant substantial exposure to market fluctuations. The point is that the avoidance of significant losses is generally worth accepting even long periods of defensiveness. Because of the mathematics of compounding, large losses have a disproportionate effect on cumulative returns. Remember that historically, most bear markets have not averaged 20%, but approach 30% or more. A 30% loss takes an 80% gain and turns it into a 26% gain. It's difficult to recover from such losses, which is why the recent bull market has not even put the market ahead of Treasury bills since 2000 or even 1998. So again, the point is that the avoidance of significant losses is typically worthwhile even if, like Baron Rothschild, one is defensive "too soon." With regard to present stock market conditions, it would take a correction of only about 10% in the S&P 500 to put the market behind Treasury bills for the most recent 3-year period. That's not an empty statistic given rich valuations, unusual bullishness, overbought conditions, rising yield trends, and a market long overdue for such a correction. Given the average return/risk profile those conditions have historically produced, it makes sense to call out "Baron Rothschild" even if we allow for the possibility of a further advance, in this particular instance, before the market inevitably corrects.
1) Let's assume that one's goal is to beat some passive index (it doesn't have to be stocks; it could be the Yen or Natgas) over an X month period. And let's further assume that one is willing to engage in "selling early." And lastly, let's assume that "selling early" is sometimes the "right" thing to do due to the essay above. As a statistical matter, what is the likely minimum value for X … that permits the speculator to beat his passive index?
2) Let's assume that one's goal is to beat a passive index (again, it doesn't have to be stocks) over an X month period. And let's further assume that one is willing to exit the market "early," but also "buy early." Obviously, if one exits, re-entering is a necessary thing to do. As a statistical matter, what is the likely minimum value for X … such that the speculator can beat his passive index?
3) As a purely statistical matter, which should be better/worse : Buying early and selling early? Or, buying late and selling late ? And, again, what is the minimum X month performance period where either strategy has a chance to beat the passive benchmark.
William Weaver writes:
1. Disposition Effect
2. Great essay and the observation of defensive over aggressive is very good but I can't agree with purely taking profits unless there is a reason to exit. Assuming sufficient liquidity, in my humble opinion, it might not be bad to tighten stops (volatility historically has fallen as equities rise - though high levels in the late 1990's - so stops based on standard deviation should tighten anyway) allowing one to lock in profits but continue to profit from any trend that develops or continues. This seems to be a prominent trait of the most successful traders I've met; allowing profits to run by controlling for risk instead of picking a top.
3. The saying "There is nothing wrong with taking small profits" is a great way to lose everything if you don't also control for losses. In this essay there is only an early exit for profits.
4. His analysis of the equity premium to Treasuries is very insightful but I will leave that to the list for independent testing.
5. Every trader is different and must play to their own personality. For me, when trading intraday (which I am new to and still not the biggest fan of but am coming along) I will take off part of a position when anything changes, and this helps manage risk (leads to a larger percentage of profitable days). But will wait for long term momentum to reverse before exiting the last half as this is where the majority of my monthly profits come from. This way I can be a wuss and still profit.
6. Read The Disposition Effect if you have not and are interested in any type of trading/speculation. (To add to things to do to become a successful speculator: know, understand and be able to identify behavioral biases both in your own trading, and in the market).
Leo Jia writes:
I don't fully understand Rocky's 3 questions at the end. Guess they are meant for some real speculations, rather than for the Baron Rothschild Game, right?
If so, then I take Will's approach as described in his Point 2, except that I don't exit on instant stops, but on closing prices of certain intervals (30 minutes for instance for position trades) if the means of the intervals trigger my stops. My feelings about instant stops are that 1) they tend to have more execution errors (due to price chasing), and 2) either they get triggered more often or I have to set them wider (meaning more losses). I don't have concrete results about this and would love to hear other opinions.
I can't see how the game closely resembles trading. From what I understand about it, there seem to be many more winning cards than losing ones. So a strategy of simply selling on random cards gives one an easy edge to beat the dealer (though not necessarily achieving the best result). Am I missing something there?
Steve Ellison adds:
Turning to writings from 100 years ago, a friend found this book in his attic in Montana and gave it to me: Fourteen Methods of Operating in the Stock Market.
The first article in this book was A Specialist in Panics, which has been discussed on the List before. This method is to buy when there is a panic.
There was another article by H.M.P. Eckhardt, "Plan for Taking Advantage of the Primary Movements". He advised buying during steep market declines, as the Specialist in Panics did, but also suggested selling if a rapid rise brought profits equal to the interest the investor could have earned over three or four years. Mr. Eckhardt surmised that, with his money already having earned its keep for at least three years, the investor would probably get a chance to put it back to work in less than three years when another panic occurred.
For these sorts of techniques, Rocky's X is the length of a business cycle, which is unknowable in advance, but would normally be at least 48 months.
Alston Mabry writes:
Let's say you start at January, 2004 (arbitrarily chosen start date, but not cherry-picked, i.e., not compared to other possible start dates), and you go to January 2012. You have $100 a month to invest. You can buy the SPY and/or hold cash. You have a total of 97 months and thus, $9700 to invest. If you buy the SPY every month (using adjusted monthly close), you wind up with:
But being a clever speculator and wanting to buy the dips, you come up with a plan: You will let your monthly cash accrue until SPY has a large drop as measured by the monthly adjclose-adjclose; each time the SPY has such a drop, you will put half your current cash into SPY at the monthly close. To decide how large the drop will be, you compute the standard deviation of the previous 12 monthly % changes, and then your buying trigger is a drop of a certain number of SDs. Your speculator friends like the plan, but disagree on the size of the drop, so each of you chooses a different number of SDs as a trigger: 0.5, 1, 1.5, 2, 2.5, 3, and the real doom-n-gloomer at 4.
The results, showing the size of the drop in SDs required to trigger a buy-in, the final value of the portfolio, and the average cash position during the entire period:
SD / final value / avg cash
0.5 $11,522.13 $543.03
1.0 $11,328.42 $737.77
1.5 $10,885.80 $1,351.02
2.0 $10,884.15 $2,083.36
2.5 $10,655.96 $2,711.34
3.0 $11,005.72 $3,704.12
4.0 $9,700.00 $4,900.00
You, of course, chose 0.5 SDs as your trigger and so come out with the biggest gain. But your friend who chose 3 SDs says that he *could* have used his larger cash position to invest in Treasuries and thus have beaten you. You say, "Coulda, woulda, shoulda."
Mr Gloom-n-Doom cheated and bought the TLT every month and wound up with $14,465.56.
93 day VIX minus spot settled at 4.76, the second highest reading since DEC07 (VXV inception). Expect mean reversion in VIX but the contango will kill VXX. Interesting that equities closed at recent lows at the same time which is a lot like the last sell-off when the term structure never inverted — like no one believed the selling or they had perfect foresight into a bounce… So vol is cheap but you get what you pay for. The prior times readings were above 4 they reverted below 4 within a week. Maybe the signal is to buy vol on a bounce in equities, but that still means fighting the contango headwind… as pointed out by two sources VIX has historically had the highest probability of making a yearly low in December (40% of years since 1990)… 14 and change might be out of reach, but it doesn't mean it can't try… seems like the political news machine has slowed recently, will that turn off into the close of the year?
No positions as of writing this and I will be sitting on my hands through the session.
I calculated from 20090101 until today the maximum 30 minute rolling standard deviation in the SPX at 1600, divided by the standard deviation in minute iterations for the day. My goal was to determine if there is a difference between a day where the move was made through the entire day, or a day where the move was made in only 30 minutes or less.
I am not writing this as a topic of research that has been completed, but rather summarizing the first 5 minutes of research that I have done so far, merely defining a direction. If I were to invest from close to close the day after a reading greater than 1 (the greatest 30 minute stdv spike was larger than the stdv of the day), the equity curve grinds from 1000 to 1019… not too great.
Below 1 it moves to 1176. The SPX moved from 1000 to 1198 (indexed at 1000). There is no advantage from this alone, but I did not take into account only large range days or only small range days which could very well be an important factor, I did try smoothing the daily data using a very short term exponential average and that did not help. Lastly, I tried taking the range of the output over the prior 1 year. From 2010 until present readings above .25 grew to 1056, readings below .025 grew to 1035 and the benchmark fell to 971. This shows more promise. The readings (as might have been guessed) are clustered in the bottom of the range given a few upward outliers (and if I am correct, I should have taken the log of the function to more evenly distribute the data as the lower side is bounded by 0).
Next steps will be to isolate large range days and small range days and then apply the output. A second test I intend to run is using the standard deviation of the minute data around a non horizontal regression (around the least squares regression of the day)… finally I will examine the last half hour, hour and 90 minutes. Another way to look at this might be to divide the range in a certain period of the day by the range of the entire day.
Just starting (now 15 minutes in!), but this is how I create a tree for further testing.
Note: just realized "present" was set to 9/30/2011.
This is how Roger Craig won more in his first five games of Jeopardy than anyone else in the history of the show.
November 29, 2011 | Leave a Comment
This is an interesting piece by Mike O'Hara that underscores the danger of grouping all algorithmic trading with HFT. One of the largest concerns regarding HFT is that it competes with legitimate market makers during normal trading, thus reducing incentives, and then leaves the market during abnormal trading, or worse taking liquidity to close positions when a market makers job is most important. This legislation, in an effort to make it impossible to side-step the responsibility of providing liquidity, would actually require a broker executing VWAPs all day to provide liquidity. Based on the below quote, one simple sidestep would be to start your algo a minute after the open and stop it a minute before the close, but doesn't this defeat the point?
Steve Ellison writes:
I have thought for some time that high frequency traders play a similar role in the market ecosystem to stock specialists. Stock specialists can profitably trade based on their knowledge of order flow, but in return are obligated to use their capital to preserve an orderly market. This proposal seems conceptually to be trying to impose similar obligations on high frequency traders.
October 26, 2011 | Leave a Comment
Does anyone have this in PDF? The Amazon hardcover is 300+ dollars.
Propaganda Analysis: a Study of Inferences Made from Nazi Propaganda in World War II
Jonathan Bower comments:
Here it is:
You can read it for only $21.
William Weaver responds:
That's the problem, there are a lot of books with similar titles, but the one I'm looking for is by Alexander George, written in 1959. The Gladwell article
(Open secrets, Enron, intelligence, and the perils of too much information [10 page PDF]) that Jeff Watson mentioned referenced the book and it seems like an interesting read. Here is the Amazon listing:
Alexander L. George (Author)
Out of Print–Limited Availability.
Bill Rafter writes:
Regarding out-of-print books, some dirtbags have been identifying those books in a local library that are both (a) in demand, and (b) out-of-print. The dirtbag then advertises the book on Amazon as "used" for a substantial sum, say $150, or in your case $300. If someone orders the book the dirtbag then goes to the library and borrows the book.
A few days later he goes back to the library and confesses as to having lost the book in a fire or flood and pays the library their lost book fee, which might be $25. At that point he has paid the library for the book and cannot be charged with selling stolen property. And you as the buyer cannot be charged with receiving stolen books. But the whole thing really stinks.
I used to collect data of the number of muggings in NYC prior to the holidays in an attempt to forecast retail sales numbers. I no longer do that because I can at best get the data weekly, and it's not good for predicting stocks in the short term, and any announced number, I have more recently found, is a crap shoot statistically.
That said, this NYT article reminded me of that research, and I wonder if there is a connection between crime and the overall health of the economy, ceteris paribus, that can give us a real time glimpse at what's going on… I always thought this data could help with jobs numbers but only have data for one city doesn't really cut it.
To a non-hand-eye-athlete this article "Nadal's Lethal Forehand" was very interesting. Nadal's top-spin of 3,200 RPM versus Federer at 2,700 and Sampras at 1,700, is aided (if I understand correctly) by his palm pointing towards the sky prior to contact. At the same time his body angle and straight arm provide added force. To the novice spectator it would seem most players must concentrate on developing one or the other as increased ability in one area is detrimental to the other, at least in the same shot.
This reminds me of combining mean reversion with trend following. I started by constructing separate strategies in each area and using them as non correlated members of a portfolio. Later I found that I could do better by using the information from each in the same system. Note that I track performance statistics separately for risk management, but have combined the signals. Best of both worlds?
The article also notes how Nadal finishes his swing either at his shoulder for high hit balls or over his head for low hit balls. For any onlooker (though they may not be able to react) one can see if the ball is high or low but I think this is a good example of adapting the same strategy to multiple scenarios, if not even a regime.
Lastly, Nadal's returns bounce an average 33 inches on hardcourts and 64 inches on clay courts. In my humble opinion it seems as though the already increased volatility of global markets has provided an environment where macro driven price action is more likely to move further than usual. I understand that implied volatility is highly correlated to historical or realized volatility, but might it be predictive, or… might it allow for (not cause) more extreme moves? Vol rises, spreads widen, the same order can now move the market further?
Just thoughts. Any information on the tennis side of this post would be greatly appreciated! Wm
Paolo Pezzutti writes:
I find very interesting that he tends to use his forehand as often as he can. The main lesson here is that he focuses and leverages on his strength. Normally we tend to work on our weaknesses to reach a balanced performance. Rather, this is an example about it is more rewarding to insist and further exploit to the extreme your best shots. Nadal uses his backhand only if he really has to do it. Instead of working hard in order to become an average performer in many different areas, it is much more rewarding to concentrate your mental and physical energies to exploit the talent you have in one specific matter. This is something I may have realized too late in my life, but it is a good lesson anyway. Paolo
My take (unimportant ramble) on the following article:
This is very important for all traders but as an algorithmic trader (Dailyspec being comprised of many counters as well), I have done well in executing the statistical set-ups generated by my systems (not to say I have been overly profitable, just to say I can follow the triggers). However, I will often look for confirmation (see confirmation bias) of a discretionary contradicting opinion in less useful statistics that may take my system(s) out of the market. Truth be told I could spend 30 minutes a night making sure my data is clean, setting up orders for the following session and go to sleep. As it stands I rarely sleep more than 5 hours, I spend upwards of 12 hours a day researching, another 4.5 coaching rowing, and the rest making sure my girlfriend doesn't get jealous of my time with the market. So basically this tells me I should just relax… And let this not come across as "I have my systems, I don't ever have to research again", but rather as "okay, I have my orders for tomorrow, lets not spend another all-nighter testing the hundreds ways I can throw rocks at my system." And I will still probably not sleep tonight, but at least I'll have more confidence in my positions, right?
Here is the article: How decision makers complicate choice.
Jeff Rollert comments:
This is a very important trend. It helps establish dominant economic players.
March 30, 2011 | 4 Comments
Here is a very interesting article on a 21 year old online poker player, Daniel Cates. Some facts about him:
1. Highest online poker earnings in the world in 2010
2. Treats dollars as points, not real money
3. Doesn't understand the utility of the value of $n,000,000; believes this is an edge; less fear/emotion
4. End goal is to create a balance of life and connect the poker player with the person
5. Hypothesis that video games create good real-time decision makers, able to process lots of data, control emotions while taking risks, be aggressive and create seemingly random decisions when they are anything but
6. Extremely conservative spender, yet eats fancy meals at cheaper restaurants (good money management)
Jeff Watson writes:
Ahem. Some people may well have formed the impression that that kid might be cheating.
Jay Pasch comments:
Or reading the cards as they lay, a good bluffer with bad cards, much like a futures trader…
Anatoly Veltman asks:
Could you expand: how is trading = bluffing?
Jay Pasch responds:
Please go read Wall Street books that were printed over 75 years ago. There are countless tactics that are out there and I will restrain from this lesson in taking away from the ability for you to learn on your own. I will however suggest that The Chair has just published about three posts in the last two months that give insight of this tactic of bluffing, just not directly coming out and saying that those who implemented were bluffing.
A couple of points worth mentioning, are that 1) You have heard the sayin' "Paintin' the Tape" 2) Remember it is commonly quoted that Institutions due to vig being lower have taken the individual stock tradin' biz away from small fries 3) Bluffing is form of trading that is categorically multi dimensional not just "buy" or "sell". 4) common trait not learned in law school but one that is picked up in practice is the art of "re-direction" while in trial.
The power or leverage to bluff these days lies in the hands of those that have positions in the respected markets that they choose to bluff with such deep pockets that for you and I to do so is laughable.
Better to learn countin' than bluffin'. Though bluffin' still exists.
J. Humbert adds:
Did this story make it to the US?
Two traders exploited a weakness in Timber Hill's robot. They made some small orders in illiquid stocks (to push up the price). Then the robot would place a large bid above the average purchase price and they could sell with a profit. They repeated this many times and made something in the $100k ballpark, I believe. Then they got convicted. It's apparently illegal to be smarter than a robot.
This is pretty great.
The identification and exploitation between the difference of two variables — 1) the probability that a team will win, and 2) the likelihood that other people have chosen that team– is very much like the markets.
The difference however, is that in markets we want to trade with others if we can be the first in and against others if we can be the last in, whereas a pool is created in a single iteration.
The amazing moves this week are consistent with my 50 year old studies as to what happens following cardinal panics like airline crashes, and presidential assassinations. A terrible move down, and then by the end of the week, right where it was before. It happened to i s p and the grains and oil and the dollar yen. What else? How to generalize?
Jon Longtin responds:
"…how to generalize?"
One thought would be to do a simple curve fit on an instrument of your choice after each event in history. Since the events themselves are unique and relatively short in duration (earthquake, assassination, terrorist bombing, etc.) and also very well defined in time, the trigger point (or time t=0) is well known almost immediately after the event happens.
In general a cusp-like response is observed (very rapid decline, followed by a well-defined apex, and then a rapid ascent (although probably not as sharp as the descent) to some threshold pre-event point (say 80%).
The underlying argument would be that people's mass reaction to any catastrophic event is similar (panic, confusion, and uncertainty followed by the gradual realization that the world is not ending, and things work back to normal). Since the underlying behavior is the same, it's not unreasonable to expect that the financial instrument's response should similarly be the same across different events. One could then try to form a single curve by appropriate scaling (so-called self-similar behavior). Then, when a new situation presents itself (hate to sound so detached when speaking of disasters), one could chart the instrument's history against the curve, and as soon as enough points were collected, match/scale it to the master curve and make an estimate as to the turn-around point and recovery and go from there.
One could further classify events into separate categories, e.g., natural disasters, political events, financial events, etc., and prepare appropriate curves for each, since the nature of the event will be similarly well defined and knowable very soon after it happens.
The engineering analog is somewhat along the following lines: a standard technique to test a system is to apply an impulse response and see how the system responds. Examples include tapping an automobile frame with a hammer and measuring how the structure responses in time, or using a gunshot to measure the acoustics in a large hall. In these measurements, the initial driver (the hammer hit or gunshot) happens so quickly that it has come and gone before the system has had a chance to even begin to respond. As a consequence the resulting measurement is only the response of the system and is not contaminated by the initial response.
In contrast, drivers that that are longer in time have a more complicated interaction with the structure, because the structure will start to respond to the first part of the driver, but the system is still being driven. The analog would be grabbing onto the car frame with your hands and shaking it repeatedly for a few minutes to get it to vibrate: the car frame will begin to response as soon as you start shaking it, but then as you continue to shake it, that further alters the response, which affects the response, etc. etc. = much more complicated to analyze and predict.
In financial terms, disasters are often very short in duration (seconds and minutes), and subsequently they behave like an impulse response, with the system being society. In contrast, an event such as the wave of unrest in the middle east is a much longer time-frame event (weeks and months): the event and the response become highly coupled, making their analysis more complicated.
Anatoly Veltman writes:
Not sure if it's a separate topic, but there are sometimes dangers when you generalize. For example, the level of EUR currency (and its perceived trend) is significantly higher today than at this sample's outset. To what degree did this influence most commodities' comeback?
Another layer that could be added to this sample's analysis: what to make of the relatively lagging instruments? Sugar, Platinum and Palladium haven't made up their losses…
The President of the Old Speculator's Club, John Tierney, responds:
How does one make generalizations from the recent events outlined by the Chair? I have no doubt that his 50-year study shows similar market reactions. However, I'm reluctant to adopt any new theories or adjust my current investment outlook due to these studies. The current environment, and one that has existed at least since the Fed initiated QE1, is the involvement of government agencies.
I and others have suggested this surreptitious presence in the past. We have been (rightly) put in our place because we failed to fulfill the Chair's mandate: "stats on the table" (something, by the way, which Rocky was very, very good at).
In the current situation and that which has existed for several years now, we KNOW that our government (and others) have been manipulating the "invisible hand." We may not be aware of the extent of the presence, or where it is being applied, but that it exists is an established (and self-confessed) fact.
With that in mind, I'm left to "guess" whether the current scenario is an accurate re-enactment of past events, or whether it has been manipulated to seem so. For years we on the List have been leery of the efficacy of any government interference in the markets. With that in mind, it's difficult to make a legitimate extrapolation from past events - the new, big, player makes any surmise questionable.
My reluctance to revise my pre-existing view of the market's course is only enhanced by the numerous television experts who are outlining a "bounce-back" scenario based on past bounce-backs. It may well occur but will it endure or will it vanish with the exit of the interference? I'm currently betting (and that IS the right word) against it.
William Weaver shares:
Check out this interesting abstract:
Behavioral economic studies reveal that negative sentiment driven by bad mood and anxiety affects investment decisions and may hence affect asset pricing. In this study we examine the effect of aviation disasters on stock prices. We find evidence of a significant negative event effect with a market average loss of more than $60 billion per aviation disaster, whereas the estimated actual loss is no more than $1 billion. In two days a price reversal occurs. We find the effect to be greater in small and riskier stocks and in firms belonging to less stable industries. This event effect is also accompanied by an increase in the perceived risk: implied volatility increases after aviation disasters without an increase in actual volatility.
Found via the Empirical Finance blog
A few months back David Aronson and I were talking about identifying markets as bullish or bearish prior to selecting strategies or parameters for various strategies. The conversation ended up taking a back seat to trading, family, etc., but I think now that markets are showing an increase in volatility it might be a good time to resume these talks.
Below I've included three links to a series of blog posts from Frank Hassler, who created (and explains) his own metric for identifying regimes, and how short term mean-reversion strategies work during different periods. What I find particularly interesting is his use of four possible regimes, whereas I use only two.
I've also found that many traders use simple metrics such as whether the broad market is above of below its 200ma when testing various strategies. My personal preference is to use fundamentals to predict longer term swings in equities.
Phil McDonnell writes:
There are a number of quirky things in the papers but overall the logic is interesting.
One quirk, for example is that he wants to use both rate of change and the slope of the moving average as indicators. Mathematically they are the same thing. Remember that a 200 day ma changes each day by lopping off the price level 200 days ago and adding in the current price. The daily difference (slop) is:
(current price - 200 days ago) / 200
But the rate of change per day is given by: (price - 200 days ago) / 200 Same thing!
We have received the following clarification from Frank Hassler:
I’m fully aware that slope = ROC.
The post isn’t about my trading, it’s rather an example what people should consider. Depending on the type of the system one should consider a different type of market environment filter.
January 20, 2011 | Leave a Comment
Did people just jump in and buy the dip, or was that the result of legions of traders going flat overnight? Wasn't a huge move, but I kind of expected more of a panic.
Victor Niederhoffer comments:
One who was short and waiting could cover his shorts short of the big house.
Paolo Pezzutti writes:
…interesting to know if there is a ten minute effect…
Victor Niederhoffer responds:
Believe it much dissipated and changed in 2010.
Russell Sears writes:
What shocked me was the out performance of the Dow compared to the S&P, especially given the relatively low inter-day vol.
To check this out I did the following, took the ln close to close Dow - ln close to close S&P then ranked them. Today was rank 37th of the 2700 days I look at. Then I took this out performance divided by the max (interdayvol Dow, inter-day vol S&P) where inter-day vol is LN(high/low) for the day. This ratio placed was number one !
I do not know what this out performance means, but looking at the dates that "beat" today or came close did not bring pleasant memories back. They were 2000 to 2001 vintage then big time gap and appeared again in Sept 2008-Jan 2009 and another small time gap. This would indicate that when things get volatile and down it often best to be in the big Dow.
What this means with a relatively weak volatile period I do not know.
I will leave it to the reader to come up with a test to see if this is a indicator of Large over small cap shift that is reverse the small outperforming large gap the last couple of years.
January 18, 2011 | 5 Comments
There was an interesting segment on 60 Minutes on 64 year old Bill Walters who apparently is a very successful professional gambler in Las Vegas who uses statistics and inside information to be a winner.
I never heard of him before. Any thoughts or more information on this gentleman.
William Weaver writes:
Billy Walters…betting the opposite side of a weak line to change the spread and then simultaneously hitting multiple venues for much larger orders before the line is updated.
Not too long ago when the price discovery of metals markets was floor-based, dealers would do the same exact thing, or at least try to, all day long. They would have a couple of different brokers in the pit each bid for a 100 lots of silver knowing that the locals would in turn bid in front of them a half-penny higher. All the while the dealer had a customer on the phone who doesn't have access to the floor and has no idea what is going on other than the prints on his screen. The price goes up and the dealer unloads his physical inventory to the customer, a presumed buyer.
If the customer is a presumed seller, say a producer, the routine is reversed.
It's all perfectly legal, and not remotely unethical as the dealer stuck his neck out by putting large bids or offers out there that could very well have been hit.
Such a seeming advantage is all part of any market's ecology and does not come without a price. There's always some barrier to entry, a hurdle that first must be overcome before exerting that kind of leverage.
January 11, 2011 | 5 Comments
Apple stocks more than tripled in just 2 years. Useless to say that I missed this move and that I did not triple my capital during the same period investing somewhere else. I am contrarian by nature, however I was "forced" by some type of compulsion to buy the IPhone4 (not the stocks unfortunately). I followed the herd. Now that I regret it (poor strength of network signal and a battery that lasts for half day at best…) I also understand how strong the AAPL trend is. They sell expensive products that sometimes do not meet expectations but that people are ready to buy at prices which are higher than products of competitors. What a money machine. Difficult, however, to keep the momentum…Time to short AAPL?
Marlowe Cassetti writes:
I will repeat my reply to the Chair's post of July 29th titled Mystical Ideas. I quote myself:
The chair has touched on a point of interest that has bothered me. I don't know about Lady Gaga, but Apple's climb towards the top of market valuation appears to be inline with the phenomenon of a bubble. Yes, I understand that we cannot declare a bubble until it bursts, but let's look at the facts: There are some 47 stock analysts that cover AAPL, all but two have either a buy or a strong buy recommendation. It is the darling of the market. Its market cap is approaching $ ¼ trillion and at the rate it is moving it is on its way to challenge Exxon Mobile Corp. XOM produces stuff that the world needs, AAPL doesn't produce stuff that the world needs just what they like to have, until something else strikes their fancy. It reminds me in the 1980's when people couldn't buy enough Wang stock. You hadn't arrived if your office didn't sport a Wang word processor. The bubble will burst when the last fool buys in at a nose bleed price.
Back to today, for Christmas I bought myself an iPod touch … my first Apple product ever. It cost only $58.00 plus some expiring frequent flier points. I was looking for a MP3 player and I got much more that a music player. I'm very impressed with its versatility and elegance. But at $300 retail it is certainly pricey. about what I paid for a very capable netbook for my wife.
Perusing a chart of AAPL it has relentless upward momentum. You cannot step in front of a freight train and short it.
William Weaver writes:
Marlowe touches on an interesting point regarding AAPL v XOM; more specifically, how AAPL, as a consumer discretionary stock, has approached the market cap of a consumer staple, which supplies a needed good versus a wanted good. For the past 6 months I have been working on scraping purchasing data from thousands of domestic websites as a way to gauge consumer spending; at some point I am looking to sell this as research, but so far trading it has been very successful.
What I've found is that it is very easy to measure discretionary purchases and very hard to measure staple purchases as most of the latter are done offline. That said, the spending data of only discretionary purchases has a .44 correlation coefficient to the following one-month return in the S&P 500 using 69 non-overlapping months. To me this says that discretionary spending drives market returns, which begs the question, is the market ever really in-line with needed value, the value of what one needs to survive, not what one wants? Would a bubble then be any return over the risk free rate assuming the risk free rate is not in a bubble itself?
With that notion, one should never short a discretionary stock like AAPL, as the market is driven by such companies. (just for fun) Remember in 2007-8 when the Washington DC metro banned Crocs because they were dangerous on escalators? We all asked "with what shoe laces" and then a day later it was found that the head of the DC metro had held a large short position for many months as the stock climbed? It doesn't pay off; the risk is much greater than the reward. At best, one could buy OTM put leaps.
December 31, 2010 | 61 Comments
- 31 Spec-listers contributed to the 2011 Investment Contest with "specific" recommendations.
- Average 4 recommendations per person (mean of 4.2, median and mode of 4) came in.
- 6 contestants gave only 1 recommendation, 3 gave only 2 and thus 9 out of the total 31 have NOT given the minimum 3 recommendations needed as per the Rules clarified by Ken Drees.
- The Hall of Fame entry for the largest number of ideas (did someone say diversification?) is from Tim Melvin, close on whose heels are J. T. Holley with 11 and Ken Drees with 10.
- The most creatively expressed entry of course has come from Rocky Humbert.
- At this moment 17 out of 31 contestants are in positive performance territory, 14 are in negative performance territory.
- Barring a major outlier of a 112.90% loss on the Option Strategy of Phil McDonnell (not accounting for the margin required for short options, but just taking the ratio of initial cash inflow to outflow):
- Average of all Individual contestant returns is -2.54% and the Standard Deviation of returns achieved by all contestants is 5.39.
- Biggest Gainer at this point is Jared Albert (with his all in single stock bet on REFR) with a 22.87% gain. The only contestant a Z score greater than 2 ( His is actually 4.72 !!)
- Biggest Loser at this point (barring the Giga-leveraged position of Mr. McDonnell) is Ken Drees at -10.36% with a Z Score that is at -1.45.
- Wildcards have not been accounted for as at this point, with wide
deviations of recommendations from the rules specified by most. While 9
participants have less than 3 recommendations, those with more than 4
include several who have not chosen to specify which 3 are their primary recommends. Without clarity on a universal measurability wildcard accounting is on hold. Those making more than 1 recommendations would find that their aggregate average return is derived by taking a sum of returns of individual positions divided by the number of recommends. Unless specified by any person that positions are taken in a specific ratio its equal sums invested approach.
- A total of 109 contracts are utilized by the contestants across bonds, equity indices (Nikkei, Kenyan Stocks included too!), commodities, currencies and individual stock positions.
- The ratio of Shorts to Longs across all recommendations, irrespective of the type of contract (call, put, bearish ETF etc.) is 4 SELL orders Vs 9 Buy Orders. Not inferring that this list is more used to pressing the Buy Button. Just an occurence on this instance.
- The Average Return, so far, on the 109 contracts utilized is -1.26% with a Standard Deviation of 12.42%. Median Return is 0.39% and the mode of Returns of all contracts used is 0.
- The Highest Return is on MICRON TECH at 28.09, if one does not account for the July 2011 Put 25 strike on SLV utilized by Phil McDonnell.
- The Lowest Return is on IPTV at -50%, if one does not account for the Jan 2012 Call 40 Strike on SLV utilized by Phil McDonnell.
- Only Two contracts are having a greater than 2 z score and only 3 contracts are having a less than -2 Z score.
Victor Niederhoffer wrote:
One is constantly amazed at the sagacity in their fields of our fellow specs. My goodness, there's hardly a field that one of us doesn't know about from my own hard ball squash rackets to the space advertising or our President, from surfing to astronomy. We certainly have a wide range.
May I suggest without violating our mandate that we consider our best sagacities as to the best ways to make a profit in the next year of 2011.
My best trades always start with assuming that whatever didn't work the most last year will work the best this year, and whatever worked the best last year will work the worst this year. I'd be bullish on bonds and bearish on stocks, bullish on Japan and bearish on US stocks.
I'd bet against the banks because Ron Paul is going to be watching them and the cronies in the institutions will not be able to transfer as much resources as they've given them in the past 2 years which has to be much greater in value than their total market value.
I keep wondering what investments I should make based on the hobo's visit and I guess it has to be generic drugs and foods.
What ideas do you have for 2011 that might be profitable? To make it interesting I'll give a prize of 2500 to the best forecast, based on results as of the end of 2011.
David Hillman writes:
"I do know that a sagging Market keeps my units from being full."
One would suggest it is a sagging 'economy' contributing to vacancy, not a sagging 'market'. There is a difference.
Ken Drees, appointed moderator of the contest, clearly states the new rules of the game:
1. Submissions for contest entries must be made on the last two days of 2010, December 30th or 31st.
2. Entries need to be labeled in subject line as "2011 contest investment prediction picks" or something very close so that we know this is your official entry.
3. Entries need 3 predictions and 1 wildcard trade prediction (anything goes on the wildcard).
4. Extra predictions may be submitted and will be judged as extra credit. This will not detract from the main predictions and may or may not be judged at all.
5. Extra predictions will be looked on as bravado– if you've got it then flaunt it. It may pay off or you may give the judge a sour palate.
The desire to have entries coming in at years end is to ensure that you have the best data as to year end 2010 and that you don't ignite someone else to your wisdom.
Market direction picks are wanted:
Examples: 30 year treasury yield will fall to 3% in 2011, S&P 500 will hit "x" by June, and then by "y" by December 2011.
The more exact your prediction is, the more weight will be given. The more exact your prediction, the more weight you will receive if right and thus the more weight you will receive if wrong. If you predict that copper will hit 5.00 dollars in 2011 and it does you will be given a great score, if you say that copper will hit 5.00 dollars in march and then it will decline to4.35 and so forth you will be judged all along that prediction and will receive extra weight good or bad. You decide on how detailed your submission is structured.
Will you try to be precise (maybe foolhardy) and go for the glory? Or will you play it safe and not stand out from the crowd? It is a doubled edged sword so its best to be the one handed market prognosticator and make your best predictions. Pretend these predictions are some pearls that you would give to a close friend or relative. You may actually help a speclister to make some money by giving up a pearl, if that speclister so desires to act upon a contest–G-d help him or her.
Markets can be currency, stocks, bonds, commodities, etc. Single stock picks can be given for the one wildcard trade prediction. If you give multiple stock picks for the wildcard then they will all be judged and in the spirit of giving a friend a pearl–lets make it "the best of the best, not one of six".
All judgments are the Chair's. The Chair will make final determination of the winner. Entries received with less than 3 market predictions will not be considered. Entries received without a wildcard will be considered.The spirit of the contest is "Give us something we can use".
Bill Rafter adds:
Suggestion for contest:
"Static" entry: A collection of up to 10 assets which will be entered on the initial date (say 12/31/2010) and will be unaltered until the end data (i.e. 12/31/2011). The assets could be a compilation of longs and shorts, or could have the 10 slots entirely filled with one asset (e.g. gold). The assets could also be a yield and a fixed rate; that is one could go long the 10-year yield and short a fixed yield such as 3 percent. This latter item will accommodate those who want to enter a prediction but are unsure which asset to enter as many are unfamiliar with the various bond coupons.
"Rebalanced" entry: A collection of up to 10 assets which will be rebalanced on the last trading day of each month. Although the assets will remain unchanged, their percentage of the portfolio will change. This is to accommodate those risk-averse entrants employing a mean-reversion strategy.
Both Static and Rebalanced entries will be judged on a reward-to-risk basis. That is, the return achieved at the end of the year, divided by the maximum drawdown (percentage) one had to endure to achieve that return.
Not sure how to handle other prognostications such as "Famous female singer revealed to be man." But I doubt such entries have financial benefits.
I'm willing to be an arbiter who would do the rebalancing if necessary. I am not willing to prove or disprove the alleged cross-dressers.
Ralph Vince writes:
A very low volume bar on the weekly (likely, the first of two consecutive) after a respectable run-up, the backdrop of rates having risen in recent weeks, breadth having topped out and receding - and a lunar eclipse on the very night of the Winter Solstice.
If I were a Roman General I would take that as a sign to sit for next few months and do nothing.
I'm going to sit and do nothing.
Sounds like an interim top in an otherwise bullish, long-term backdrop.
Gordon Haave writes:
My three predictions:
Gold/ silver ratio falls below 25 Kenyan stock market outperforms US by more than 10%
Dollar ends 10% stronger compared to euro
All are actionable predictions.
Steve Ellison writes:
I did many regressions looking for factors that might predict a year-ahead return for the S&P 500. A few factors are at extreme values at the end of 2010.
The US 10-year Treasury bond yield at 3.37% is the second-lowest end-of year yield in the last 50 years. The S&P 500 contract is in backwardation with the front contract at a 0.4% premium to the next contract back, the second highest year-end premium in the 29 years of the futures.
Unfortunately, neither of those factors has much correlation with the price change in the S&P 500 the following year. Here are a few that do.
The yield curve (10-year yield minus 3-month yield) is in the top 10% of its last 50 year-end values. In the last 30 years, the yield curve has been positively correlated with year-ahead changes in the S&P 500, with a t score of 2.17 and an R squared of 0.143.
The US unemployment rate at 9.8% is the third highest in the past 60 years. In the last 30 years, the unemployment rate has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.90 and an R squared of 0.028.
In a variation of the technique used by the Yale permabear, I calculated the S&P 500 earnings/price ratio using 5-year trailing earnings. I get an annualized earnings yield of 4.6%. In the last 18 years, this ratio has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.92 and an R squared of
Finally, there is a negative correlation between the 30-year S&P 500 change and the year-ahead change, with a t score of -2.28 and an R squared of 0.094. The S&P 500 index price is 9.27 times its price of 30 years ago. The median year-end price in the last 52 years was 6.65 times the price 30 years earlier.
Using the predicted values from each of the regressions, and weighting the predictions by the R squared values, I get an overall prediction for an 11.8% increase in the S&P 500 in 2011. With an 11.8% increase, SPY would close 2011 at 140.52.
Factor Prediction t N R sq
US Treasury yield curve 1.162 2.17 30 0.143
30-year change 1.052 -2.28 52 0.094
Trailing 5-year E/P 1.104 0.92 18 0.050
US unemployment rate 1.153 0.90 30 0.028
Weighted total 1.118
SPY 12/30/10 125.72
Predicted SPY 12/30/11 140.52
Jan-Petter Janssen writes:
PREDICTION I - The Inconvenient Truth The poorest one or two billion on this planet have had enough of increasing food prices. Riots and civil unrest force governments to ban exports, and they start importing at any cost. World trade collapses. Manufacturers of farm equipment will do extremely well. Buy the most undervalued producer you can find. My bet is
* Kverneland (Yahoo: KVE.OL). NOK 6.50 per share today. At least NOK 30 on Dec 31th 2011.
PREDICTION II - The Ultimate Bubble The US and many EU nations hold enormous gold reserves. E.g. both Italy and France hold the equivalent of the annual world production. The gold meme changes from an inflation hedge / return to the gold standard to (a potential) over-supply from the selling of indebted nations. I don't see the bubble bursting quite yet, but
* Short gold if it hits $2,000 per ounce and buy back at $400.
PREDICTION III - The Status Quo Asia's ace is cheap labor. The US' recent winning card is cheap energy through natural gas. This will not change in 2011. Henry Hub Feb 2011 currently trades at $4.34 per MMBtu. Feb 2012 is at $5.14. I would
* Short the Feb 2012 contract and buy back on the last trading day of 2011.
Vince Fulco predicts:
This is strictly an old school, fundamental equity call as my crystal ball for the indices 12 months out is necessarily foggy. My recommendation is BP equity primarily for the reasons I gave earlier in the year on June 5th (stock closed Friday, June 4th @ $37.16, currently $43.53). It faced a hellish downdraft post my mention for consideration, primarily due to the intensification of news flow and legal unknowns (Rocky articulated these well). Also although the capital structure arb boys savaged the equity (to 28ish!), it is up nicely to year's end if one held on and averaged in with wide scales given the heightened vol.
Additional points/guesstimates are:
1) If 2010 was annus horribilis, 2011 with be annus recuperato. A chastened mgmt who have articulated they'll run things more conservatively will have a lot to prove to stakeholders.
2) Dividend to be re-instated to some level probably by the end of the second quarter. I am guessing $1.00 annualized per ADS as a start (or
2.29%), this should bring in the index hugging funds with mandates for only holding dividend payers. There is a small chance for a 1x special dividend later in the year.
3) Crude continues to be in a state of significant profitability for the majors in the short term. It would appear finding costs are creeping however.
4) The lawsuits and additional recoveries to be extracted from the settlement fund and company directly have very long tails, on the order of 10 years.
5) The company seems fully committed to sloughing off tertiary assets to build up its liquid balance sheet. Debt to total capital remains relatively low and manageable.
6) The stock remains at a significant discount to its better-of breed peers (EV/normalized EBITDA, Cash Flow, etc) and rightly so but I am betting the discount should narrow back to near historical levels.
1) The company and govt have been vastly understating the remaining fuel amounts and effects. Release of independent data intensifies demands for a much larger payout by the company closer to the highest end estimates of $50-80B.
2) It experiences another similar event of smaller magnitude which continues to sully the company's weakened reputation.
3) China admits to and begins to fear rampant inflation, puts the kabosh to the (global) economy and crude has a meaningful decline the likes of which we haven't seen in a few years.
4) Congress freaks at a >$100-120 price for crude and actually institutes an "excess profits" tax. Less likely with the GOP coming in.
A buy at this level would be for an unleveraged, diversified, longer term acct which I have it in. However, I am willing to hold the full year or +30% total return (including special dividend) from the closing price of $43.53 @ 12/30/10, whichever comes first. Like a good sellside recommendation, I believe the stock has downside of around 20% (don't they all when recommended!?!) where I would consider another long entry depending on circumstances (not pertinent to the contest).
Mr. Albert enters:
Single pick stock ticker is REFR
The only way this gold chain wearing day trader has a chance against all the right tail brain power on the list is with one high risk/high reward put it all on red kind of micro cap.
Basic story is this company owns all the patents to what will become the standard for switchable glazings (SPD smart glass). It's taken roughly 50 years of development to get a commercialized product, and next year Mercedes will almost without doubt use SPD in the 2012 SLK (press launch 1/29/11 public launch at the Geneva auto show in march 2011).
Once MB validate the tech, mass adoption and revenues will follow etc and this 'show me' stock will rocket to the moon.
Dan Grossman writes:
Trying to comply with and adapt the complex contest rules (which most others don't seem to be following in any event) to my areas of stock market interest:
1. The S&P will be down in the 1st qtr, and at some point in the qtr will fall at least
2. For takeover investors: GENZ will (finally) make a deal to be acquired in the 1st qtr for a value of at least $80; and AMRN after completion of its ANCHOR trial will make a deal to be acquired for a price of at least $8.
3. For conservative investors: Low multiple small caps HELE and DFG will be up a combined average of 20% by the end of the year.
For my single stock pick, I am something of a johnny-one-note: MNTA will be up lots during the year — if I have to pick a specific amount, I'd say at least 70%. (My prior legal predictions on this stock have proved correct but the stock price has not appropriately reflected same.)
Finally, if I win the contest (which I think is fairly likely), I will donate the prize to a free market or libertarian charity. I don't see why Victor should have to subsidize this distinguished group that could all well afford an contest entrance fee to more equitably finance the prize.
Best to all for the New Year,
Gary Rogan writes:
1. S&P 500 will rise 3% by April and then fall 12% from the peak by the end of the year.
2. 30 year treasury yields will rise to 5% by March and 6% by year end.
3. Gold will hit 1450 by April, will fall to 1100 by September and rise to 1550 by year end.
Wildcard: Short Netflix.
Jack Tierney, President of the Old Speculator's Club, writes:
Equal Amounts in:
TBT (short long bonds)
YCS (short Yen)
GRU (Long Grains - heavy on wheat)
CHK (Long NG - takeover)
BONXF.PK or BTR.V (Long junior gold)
12/30 closing prices (in order):
Bill Rafter writes:
Buy: FXP and IRWD
Hold for the entire year.
William Weaver writes:
For Returns: Long XIV January 21st through year end
For Return/Risk: Long XIV*.30 and Long VXZ*.70 from close today
I hope everyone has enjoyed a very merry holiday season, and to all I wish a wonderful New Year.
Ken Drees writes:
Yes, they have been going up, but I am going contrary contrary here and going with the trends.
1. Silver: buy day 1 of trading at any price via the following vehicles: paas, slw, exk, hl –25% each for 100% When silver hits 39/ounce, sell 10% of holdings, when silver hits 44/ounce sell 30% of holdings, when silver hits 49 sell 60%–hold rest (divide into 4 parts) and sell each tranche every 5 dollars up till gone–54/oz, 59, 64, 69.
2. Buy GDXJ day 1 (junior gold miner etf)—rotation down from majors to juniors with a positive gold backdrop. HOLD ALL YEAR.
3. USO. Buy day 1 then do—sell 25% at 119/bbl oil, sell 80% at 148/bbl, sell whats left at 179/bbl or 139/bbl (whichever comes first after 148)
wildcard: AMEX URANUIM STOCKS. UEC, URRE, URZ, DNN. 25% EACH, buy day 1 then do SELL 70% OF EVERYTHING AT 96$LB u http://www.uxc.com/ FOR PRICING, AND HOLD REST FOR YEAR END.
Happy New Year!
Ken Drees———keepin it real.
Sam Eisenstadt forecasts:
My forecast for the S&P 500 for the year ending Dec 31, 2011;
S&P 500 1410
Anton Johnson writes:
Equal amounts allocated to:
EDZ Short moc 1-21-2011, buy to cover at 50% gain, or moc 12/30/2011
VXX Short moc 1-21-2011, buy to cover moc 12/30/2011
UBT Short moo 1-3-2011, buy to cover moc 12/30/2011
Scott Brooks picks:
Evenly between the 4 (25% each)
Sushil Kedia predicts:
3) Japanese Yen
30% moves approximately in each, within 2011.
Rocky Humbert writes:
(There was no mention nor requirement that my 2011 prediction had to be in English. Here is my submission.) … Happy New Year, Rocky
Sa aking mahal na kaibigan: Sa haba ng 2010, ako na ibinigay ng ilang mga ideya trading na nagtrabaho sa labas magnificently, at ng ilang mga ideya na hindi na kaya malaki. May ay wala nakapagtataka tungkol sa isang hula taon dulo, at kung ikaw ay maaaring isalin ito talata, ikaw ay malamang na gawin ang mas mahusay na paggawa ng iyong sariling pananaliksik kaysa sa pakikinig sa mga kalokohan na ako at ang iba pa ay magbigay. Ang susi sa tagumpay sa 2011 ay ang parehong bilang ito ay palaging (tulad ng ipinaliwanag sa pamamagitan ng G. Ed Seykota), sa makatuwid: 1) Trade sa mga kalakaran. 2) Ride winners at losers hiwa. 3) Pamahalaan ang panganib. 4) Panatilihin ang isip at diwa malinaw. Upang kung saan gusto ko idagdag, fundamentals talaga bagay, at kung ito ay hindi magkaroon ng kahulugan, ito ay hindi magkaroon ng kahulugan, at diyan ay wala lalo na pinakinabangang tungkol sa pagiging isang contrarian bilang ang pinagkasunduan ay karaniwang karapatan maliban sa paggawa sa mga puntos. (Tandaan na ito ay pinagkasunduan na ang araw ay babangon na bukas, na quote Seth Klarman!) Pagbati para sa isang malusog na masaya at pinakinabangang 2011, at siguraduhin na basahin www.rockyhumbert.com kung saan ako magsulat sa Ingles ngunit ang aking mga saloobin ay walang malinaw kaysa talata na ito, ngunit inaasahan namin na ito ay mas kapaki-pakinabang.
Dylan Distasio comments:
Gawin mo magsalita tagalog?
Gary Rogan writes:
After a worthy challenge, Mr. Rogan is now also a master of Google Translate, and a discoverer of an exciting fact that Google Translate calls Tagalog "Filipino". This was a difficult obstacle for Mr. Rogan to overcome, but he persevered and here's Rocky's prediction in English (sort of):
My dear friend: Over the course of 2010, I provided some trading ideas worked out magnificently, and some ideas that are not so great. There is nothing magical about a forecast year end, and if you can translate this paragraph, you will probably do better doing your own research rather than listening to the nonsense that I and others will give. The key to success in 2011 is the same as it always has (as explained by Mr. Ed Seykota), namely: 1) Trade with the trend.
2) Ride cut winners and losers. 3) Manage risk. 4) Keep the mind and spirit clear. To which I would add, fundamentals really matter, and if it does not make sense, it does not make sense, and there is nothing particularly profitable about being a contrarian as the consensus is usually right but turning points. (Note that it is agreed that the sun will rise tomorrow, to quote Seth Klarman) Best wishes for a happy healthy and profitable 2011, and be sure to read www.rockyhumbert.com which I write in English but my attitude is nothing clearer than this paragraph, but hopefully it is more useful.
Tim Melvin writes:
Ah the years end prediction exercise. It is of course a mostly useless exercise since not a one of us can predict what shocks, positive or negative, the world and the markets could see in 2011. I find it crack up laugh out loud funny that some pundits come out and offer up earnings estimates, GDP growth assumptions and interest rate guesses to give a precise level for the year end S&P 500 price. You might as well numbers out of a bag and rearrange them by lottery to come up with a year end number. In a world where we are fighting two wars, a hostile government holds the majority of our debt and several sovereign nations continually teeter on the edge of oblivion it's pretty much ridiculous to assume what could happen in the year ahead. Having said that, as my son's favorite WWE wrestler when he was a little guy used to say "It's time to play the game!"
Ill start with bonds. I have owned puts on the long term treasury market for two years now. I gave some back in 2010 after a huge gain in 2009 but am still slightly ahead. Ill roll the position forward and buy January 2012 puts and stay short. When I look at bods I hear some folks talking about rising basic commodity prices and worrying about inflation. They are of course correct. This is happening. I hear some other really smart folks talking of weak real estate, high jobless rates and the potential for falling back into recession. Naturally, they are also exactly correct. So I will predict the one thing no one else is. We are on the verge of good old fashioned 1970s style stagflation. Commodity and basic needs prices will accelerate as QE2 has at least stimulated demand form emerging markets by allowing these wonderful credits to borrow money cheaper than a school teacher with a 750 FICO score. Binds go lower as rates spike. Our economy and balance sheet are a mess and we have governments run by men in tin hats lecturing us on fiscal responsibility. How low will they go Tim? How the hell do I know? I just think they go lower by enough for me to profit.
Nor can I tell you where the stock market will go this year. I suspect we have had it too good for too long for no reason so I think we get at least one spectacular gut wrenching, vomit inducing sell off during the year. Much as lower than expected profits exposed the silly valuations of the new paradigm stocks I think that the darling group, retail , will spark a sell-off in the stock market this year. Sales will be up a little bit but except for Tiffany's (TIF) and that ilk margins are horrific. Discounting started early this holiday and grew from there. They will get steeper now that that Santa Claus has given back my credit card and returned to the great white north. The earnings season will see a lot of missed estimates and lowered forecasts and that could well pop the bubble. Once it starts the HFT boys and girls should make sure it goes lower than anyone expects.
Here's the thing about my prediction. It is no better than anyone else's. In other words I am talking my book and predicting what I hope will happen. Having learned this lesson over the years I have learned that when it comes to market timing and market direction I am probably the dumbest guy in the room. Because of that I have trained myself to always buy the stuff that's too cheap not to own and hold it regardless. After the rally since September truly cheap stuff is a little scarce on the ground but I have found enough to be about 40% long going into the year. I have a watch list as long as a taller persons right arm but most of it hover above truly cheap.
Here is what I own going into the year and think is still cheap enough to buy. I like Winn Dixie (WINN). The grocery business sucks right now. Wal mart has crushed margins industry wide. That aside WINN trades at 60% of tangible book value and at some point their 514 stores in the Southeast will attract attention from investors. A takeover here would be less than shocking. I will add Presidential Life (PLFE) to the list. This stock is also at 60% of tangible book and I expect to see a lot of M&A activity in the insurance sector this year and this should raise valuations across the board. I like Miller Petroleum (MILL) with their drilling presence in Alaska and the shale field soft Tennessee. This one trades at 70% of tangible book. Ill add Imperial Sugar (IPSU), Syms (SYMS) and Micron tech (MU) and Avatar Holdings (AVTR) to my list of cheapies and move on for now.
I am going to start building my small bank portfolio this year. Eventually this group becomes the F-you walk away money trade of the decade. As real estate losses work through the balance sheet and some measure of stability returns to the financial system, perhaps toward the end of the year the small baileys savings and loan type banks should start to recover. We will also see a mind blowing M&A wave as larger banks look to gain not just market share but healthy assets to put on the books. Right now these names trade at a fraction of tangible book value. They will reach a multiple of that in a recovery or takeover scenario. Right now I own shares of Shore Bancshares (SHBI), a local bank trading at 80% of book value and a reasonably healthy loan portfolio. I have some other mini microcap banks as well that shall remain my little secret and not used to figure how my predictions work out. I mention them because if you have a mini micro bank in your community you should go meet then bankers, review the books and consider investing if it trades below the magical tangible book value and has excess capital. Flagstar Bancorp(FBC) is my super long shot undated call option n the economy and real estate markets.
I will also play the thrift conversion game heavily this year. With the elimination of the Office of Thrift Services under the new financial regulation many of the benefits of being a private or mutual thrift are going away. There are a ton of mutual savings banks that will now convert to publicly traded banks. A lot of these deals will be priced below the pro forma book value that is created by adding all that lovely IPO cash to the balance sheet without a corresponding increase in the shares outstanding. Right now I have Fox Chase Bancorp (FXCB) and Capital Federal Financial(CFFN). There will be more. Deals are happening every day right now and again I would keep an eye out for local deals that you can take advantage of in the next few months.
I also think that 2011 will be the year of the activist investor. These folks took a beating since 2007 but this should be their year. There is a ton of cash on corporate balance sheets but lots of underperformance in the current economic environment. We will see activist drive takeovers, restructures, and special dividends this year in my opinion. Recent filings of interest include strong activist positions in Surmodics(SRDX), SeaChange International (SEAC), and Energy Solutions. Tracking activist portfolios and 13D filings should be a very profitable activity in 2011.
I have been looking at some interesting new stuff with options as well I am not going to give most of it away just yet but I ll give you one stimulated by a recent list discussion. H and R Black is highly likely to go into a private equity portfolio next year. Management has made every mistake you can make and the loss of RALs is a big problem for the company. However the brand has real value. I do not want town the stock just yet but I like the idea of selling the January 2012 at $.70 to $.75. If you cash secure the put it's a 10% or so return if the stock stays above the strike. If it falls below I' ll be happy to own the stock with a 6 handle net. Back in 2008 everyone anticipated a huge default wave to hit the high yield market. Thanks to federal stimulus money pumping programs it did not happen. However in the spirit of sell the dog food the dog will eat a given moment the hedge fund world raised an enormous amount od distressed debt money. Thanks to this high yield spreads are far too low. CCC paper in particular is priced at absurd levels. These things trade like money good paper and much of it is not. Extend and pretend has helped but if the economy stays weak and interest rates rise rolling over the tsunami f paper due over the next few years becomes nigh onto impossible. I am going take small position in puts on the various high yield ETFs. If I am right they will explode when that market implodes. Continuing to talk my book I hope this happens. Among my nightly prayers is "Please God just one more two year period of asset rich companies with current payments having bonds trade below recovery value and I promise not to piss the money away this time. Amen.
PS. If you add in risk arbitrage spreads of 30% annualized returns along with this I would not object. Love, Tim.
I can't tell you what the markets will do. I do know that I want to own some safe and cheap stocks, some well capitalized small banks trading below book and participate in activist situation. I will be under invested in equities going into the year hoping my watch list becomes my buy list in market stumble. I will have put positions on long T-Bonds and high yield hoping for a large asymmetrical payoff.
Other than that I am clueless.
Kim Zussman comments:
Does anyone else think this year is harder than usual to forecast? Is it better now to forecast based on market fundamentals or mass psychology? We are at a two year high in stocks, after a huge rally off the '09 bottom that followed through this year. One can make compelling arguments for next year to decline (best case scenarios already discounted, prior big declines followed by others, volatility low, house prices still too high, FED out of tools, gov debt/gdp, Roubini says so, benefits to wall st not main st, persistent high unemployment, Year-to-year there is no significant relationship, but there is a weak down tendency after two consecutive up years. ). And compelling arguments for up as well (crash-fears cooling, short MA's > long MA's, retail investors and much cash still on sidelines, tax-cut extended, employee social security lowered, earnings increasing, GDP increasing, Tepper and Goldman say so, FED herding into risk assets, benefits to wall st not main st, employment starting to increase).
Is the level of government market-intervention effective, sustainable, or really that unusual? The FED looks to be avoiding Japan-style deflation at all costs, and has a better tool in the dollar. A bond yields decline would help growth and reduce deflation risk. Increasing yields would be expected with increasing inflation; bad for growth but welcomed by retiring boomers looking for fixed income. Will Obamacare be challenged or defanged by states or in the supreme court? Will 2011 be the year of the muni-bubble pop?
A ball of confusion!
4 picks in equal proportion:
long XLV (health care etf; underperformed last year)
long CMF (Cali muni bond fund; fears over-wrought, investors still need tax-free yield)
short GLD (looks like a bubble and who needs gold anyway)
short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than vigilantism)
Alan Millhone writes:
I note discussion over the rules etc. Then you have a fellow like myself who has never bought or sold through the Market a single share.
For myself I will stick with what I know a little something. No, not Checkers —
Rental property. I have some empty units and beginning to rent one or two of late to increase my bottom line.
I will not venture into areas I know little or nothing and will stay the course in 2011 with what I am comfortable.
Happy New Year and good health,
Jay Pasch predicts:
2010 will close below SP futures 1255.
Buy-and-holders will be sorely disappointed as 2011 presents itself as a whip-saw year.
99% of the bullish prognosticators will eat crow except for the few lonely that called for a tempered intra-year high of ~ SPX 1300.
SPX will test 1130 by April 15 with a new recovery high as high as 1300 by the end of July.
SPX 1300 will fail with new 2011 low of 1050 before ending the year right about where it started.
The Midwest will continue to supply the country with good-natured humble stock, relatively speaking.
Chris Tucker enters:
Buy and Hold
Wildcard: Buy and Hold AVAV
Gibbons Burke comments:
Mr. Ed Seykota once outlined for me the four essential rules of trading:
1) The trend is your friend (till it bends when it ends.)
2) Ride your winners.
3) Cut your losses short.
4) Keep the size of your bet small.
Then there are the "special" rules:
5) Follow all the rules.
and for masters of the game:
6) Know when to break rule #5
A prosperous and joy-filled New Year to everyone.
John Floyd writes:
In no particular order with target prices to be reached at some point in 2011:
1) Short the Australian Dollar:current 1.0220, target price .8000
2) Short the Euro: current 1.3375, target price 1.00
3) Short European Bank Stocks, can use BEBANKS index: current 107.40, target 70
A Mr. Krisrock predicts:
1…housing will continue to lag…no matter what can be done…and with it unemployment will remain
2…bonds will outperform as republicans will make cutting spending the first attack they make…QE 2 will be replaced by QE3
3…with every economist in the world bullish, stocks will underperform…
4…commodities are peaking ….
Laurel Kenner predicts:
After having made monkeys of those luminaries who shorted Treasuries last year, the market in 2011 has had its laugh and will finally carry out the long-anticipated plunge in bond prices.
Short the 30-year bond futures and cover at 80.
Pete Earle writes:
All picks are for 'all year' (open first trading day/close last trading day).
1. Long EUR/USD
2. Short gold (GLD)
MMR (McMoran Exploration Corp)
HDIX (Home Diagnostics Inc)
TUES (Tuesday Morning Corp)
PBP (Powershares S&P500 Buy-Write ETF)
NIB (iPath DJ-UBS Cocoa ETF)
KG (King Pharmaceuticals)
Happy New Year to all,
Paolo Pezzutti enters:
If I may humbly add my 2 cents:
- bearish on S&P: 900 in dec
- crisis in Europe will bring EURUSD down to 1.15
- gold will remain a safe have haven: up to 1500
- big winner: natural gas to 8
J.T Holley contributes:
The Market Mistress so eloquently must come first and foremost. Just as daily historical stats point to betting on the "unchanged" so is my S&P 500 trade for calendar year 2011. Straddle the Mistress Day 1. My choice for own reasons with whatever leverage is suitable for pain thresholds is a quasi straddle. 100% Long and 50% Short in whatever instrument you choose. If instrument allows more leverage, first take away 50% of the 50% Short at suitable time and add to the depreciated/hopefully still less than 100% Long. Feel free to add to the Long at this discretionary point if it suits you. At the next occasion that is discretionary take away remaining Short side of Quasi Straddle, buckle up, and go Long whatever % Long that your instrument or brokerage allows till the end of 2011. Take note and use the historical annual standard deviation of the S&P 500 as a rudder or North Star, and throw in the quarterly standard deviation for testing. I think the ambiguity of the current situation will make the next 200-300 trading days of data collection highly important, more so than prior, but will probably yield results that produce just the same results whatever the Power Magnification of the Microscope.
Long the U.S. Dollar. Don't bother with the rest of the world and concern yourself with which of the few other Socialist-minded Country currencies to short. Just Long the U.S. Dollar on Day 1 of 2011. Keep it simple and specialize in only the Long of the U.S. Dollar. Cataclysmic Economic Nuclear Winter ain't gonna happen. When the Pastor preaches only on the Armageddon and passes the plate while at the pulpit there is only one thing that happens eventually - the Parish dwindles and the plate stops getting filled. The Dollar will bend as has, but won't break or at least I ain't bettin' on such.
Ala Mr. Melvin, Short any investment vehicle you like that contains the words or numerals "perpetual maturity", "zero coupon" and "20-30yr maturity" in their respective regulated descriptions, that were issued in times of yore. Unfortunately it doesn't work like a light switch with the timing, remember it's more like air going into a balloon or a slow motion see-saw. We always want profits initially and now and it just doesn't work that way it seems in speculation. Also, a side hedge is to start initially looking at any financial institution that begins, dabbles, originates and gains high margin fees from 50-100 year home loans or Zero-Coupon Home Loans if such start to make their way Stateside. The Gummit is done with this infusion and cheer leading. They are in protection mode, their profit was made. Now the savy financial engineers that are left or upcoming will continue to find ways to get the masses to think they "Own" homes while actually renting them. Think Car Industry '90-'06 with. Japan did it with their Notes and I'm sure some like-minded MBA's are baiting/pushing the envelopes now in board rooms across the U.S. with their profitability and ROI models, probably have ditched the Projector and have all around the cherry table with IPads watching their presentation. This will ultimately I feel humbly be the end of the Mortgage Interest Deduction as it will be dwindled down to a moot point and won't any longer be the leading tax deduction that it was created to so-called help.
Short Gold, Short it, Short it more. Take all of your emotions and historical supply and demand factors out of the equation, just look at the historical standard deviation and how far right it is and think of Buzz Lightyear in Toy Story and when he thought he was actually flying and the look on his face at apex realization. That plus continue doing a study on Google Searches and the number of hits on "stolen gold", "stolen jewelery", and Google Google side Ads for "We buy Gold". I don't own gold jewelery, and have surrendered the only gold piece that I ever wore, but if I was still wearing it I'd be mighty weary of those that would be willing to chop a finger off to obtain. That ain't my fear, that's more their greed.
Long lithium related or raw if such. Technology demands such going forward.
Long Natural Gas. Trading Day 1 till last trading day of the year. The historic "cheap" price in the minds of wannabe's will cause it to be leveraged long and oft with increasing volume regardless of the supply. Demand will follow, Pickens sowed the seeds and paid the price workin' the mule while plowin'. De-regulation on the supply side of commercial business statements is still in its infancy and will continue, politics will not beat out free markets going into the future.
Long Crude and look to see the round 150 broken in years to come while China invents, perfects, and sees the utility in the Nuclear fueled tanker.
Long LED, solar, and wind generation related with tiny % positions. Green makes since, its here to stay and become high margined profitable businesses.
Short Sugar. Sorry Mr. Bow Tie. Monsanto has you Beet! That being stated, the substitute has arrived and genetically altered "Roundup Ready" is here to stay no matter what the Legislative Luddite Agrarians try, deny, or attempt. With that said, Long MON. It is way more than a seed company. It is more a pharmaceutical engineer and will bring down the obesity ridden words Corn Syrup eventually as well. Russia and Ireland will make sure of this with their attitudes of profit legally or illegally.
Prepare to long in late 2011 the commercialized marijuana and its manufacturing, distribution companies that need to expand profitability from its declining tobacco. Altria can't wait, neither can Monsanto. It isn't a moral issue any longer, it's a financial profit one. We get the joke, or choke? If the Gummit doesn't see what substitutes that K2 are doing and the legal hassles of such and what is going on in Lisbon then they need to have an economic lesson or two. It will be a compromise between the Commercial Adjective Definition Agrarians and Gummit for tax purposes with the Green theme continuing and lobbying.
Short Coffee, but just the 1st Qtr of 2011. Sorry Seattle. I will also state that there will exist a higher profit margin substitute for the gas combustible engine than a substitute for caffeine laden coffee.
Sex and Speculation:
Look to see www.fyretv.com go public in 2011 with whatever investment bank that does such trying their best to be anonymous. Are their any investment banks around? This Boxxx will make Red Box blush and Apple TV's box envious. IPTV and all related should be a category that should be Longed in 2011 it is here to stay and is in it's infancy. Way too many puns could be developed from this statement. Yes, I know fellas the fyre boxxx is 6"'s X 7"'s.
This is one category to always go Long. I have vastly improved my guitar playin' in '10 and will do so in '11. AAPL still has the edge and few rivals are even gaining market share and its still a buy on dips, sell on highs empirically counted. They finally realized that .99 cents wasn't cutting it and .69 cents was more appropriate for those that have bought Led Zeppelin IV songs on LP, 8-track, cassette, and CD over the course of their lives. Also, I believe technology has a better shot at profitably bringing music back into public schools than the Federal or State Gummits ever will.
Long - Your mind. Double down on this Day 1 of 2011. It's the most capable, profitable thing you have going for you. I just learned this after the last 36 months.
Long - Counting, you need it now more than ever. It's as important as capitalism.
Long - Being humble, it's intangible but if quantified has a STD of 4 if not higher.
Long - Common Sense.
Long - Our Children. The media is starting to question if their education is priceless, when it is, but not in their context or jam.
Short - Politics. It isn't a spectator sport and it has been made to be such.
Short - Fear, it is way way been played out. Test anything out there if you like. I have. It is prevalent still and disbelief is rampant.
Long - Greed, but don't be greedy just profitable. Wall Street: Money Never Sleeps was the pilot fish.
I had to end on a Long note.
Happy New Year's Specs. Thanks to all for support over the last four years. I finally realized that it ain't about being right or wrong, just profitable in all endeavors. Too many losses led to this, pain felt after lookin' within, and countin' ones character results with pen/paper.
Russ Sears writes:
For my entry to the contest, I will stick with the stocks ETF, and the index markets and avoid individual stocks, and the bonds and interest rates. This entry was thrown together rather quickly, not at all an acceptable level if it was real money. This entry is meant to show my personal biases and familiarity, rather than my investment regiment. I am largely talking my personal book.
Therefore, in the spirit of the contest , as well as the rules I will expose my line of thinking but only put numbers on actual entry predictions. Finally, if my caveats are not warning enough, I will comment on how a prediction or contest entry differs from any real investment. I would make or have made.
The USA number one new product export will continue to be the exportation of inflation. The printing of dollars will continue to have unintended consequences than its intended effect on the national economy but have an effect on the global economy.. Such monetary policy will hit areas with the most potential for growth: the emerging markets of China and India. In these economies, that spends over half their income on food, food will continue to rise. This appears to be a position opposite the Chairs starting point prediction of reversal of last year's trends.
Likewise, the demand for precious metals such as gold and silver will not wane as these are the poor man's hedge against food cost. It may be overkill for the advanced economies to horde the necessities and load up on precious metals Yet, unlike the 70's the US/ European economy no longer controls gold and silver a paradigm shift in thinking that perhaps the simple statistician that uses weighted averages and the geocentric economist have missed. So I believe those entries shorting gold or silver will be largely disappointed. However in a nod to the chair's wisdom, I will not pick metals directly as an entry. Last year's surprise is seldom this year's media darling. However, the trend can continue and gold could have a good year. The exception to the reversal rule seems to be with bubbles which gain a momentum of their own, apart from the fundamentals. The media has a natural sympathy in suggesting a return to the drama of he 70's, the stagflation dilemma, ,and propelling an indicator of doom. With the media's and the Fed's befuddled backing perhaps the "exception" is to be expected. But I certainly don't see metal's impending collapse nor its continued performance.
The stability or even elevated food prices will have some big effects on the heartland.
1. For my trend is your friend pick: Rather than buy directly into a agriculture commodity based index like DBA, I am suggesting you buy an equity agriculture based ETF like CRBA year end price at 77.50. I am suggesting that this ETF do not need to have commodities produce a stellar year, but simply need more confirmation that commodity price have established a higher long term floor. Individually I own several of these stocks and my wife family are farmers and landowners (for full disclosure purposes not to suggest I know anything about the agriculture business) Price of farmland is raising, due to low rates, GSE available credit, high grain prices due to high demand from China/India, ethanol substitution of oil A more direct investment in agriculture stability would be farmland. Farmers are buying tractors, best seeds and fertilizers of course, but will this accelerate. Being wrong on my core theme of stable to rising food/commodity price will ruin this trade. Therefore any real trade would do due diligence on individual stocks, and put a trailing floor. And be sensitive to higher volatility in commodities as well as a appropriate entry and exit level.
2. For the long term negative alpha, short term strength trade: I am going with airlines and FAA at 49.42 at year end. There seems to be finally some ability to pass cost through to the consumer, will it hold?
3. For the comeback of the year trade XHB: (the homebuilders ETF), bounces back with 25% return. While the overbuilding and vacancy rates in many high population density areas will continue to drag the home makes down, the new demand from the heartland for high end houses will rise that is this is I am suggesting that the homebuilders index is a good play for housing regionally decoupling from the national index. And much of what was said about the trading of agriculture ETF, also apply to this ETF. However, while I consider this a "surprise", the surprise is that this ETF does not have a negative alpha or slightly positive. This is in-line with my S&P 500 prediction below. Therefore unless you want volatility, simply buying the S&P Vanguard fund would probably be wiser. Or simply hold these inline to the index.
4. For the S&P Index itself I would go with the Vanguard 500 Fund as my vehicle VFINXF, and predict it will end 2011 at $145.03, this is 25% + the dividend. This is largely due to how I believe the economy will react this year.
5. For my wild card regional banks EFT, greater than IAT > 37.50 by end 2011…
Yanki Onen writes:
I would like to thank all for sharing their insights and wisdom. As we all know and reminded time to time, how unforgiven could the market Mistress be. We also know how nurturing and giving it could be. Time to time i had my share of falls and rises. Everytime I fall, I pick your book turn couple of pages to get my fix then scroll through articles in DSpecs seeking wisdom and a flash of light. It never fails, before you know, back to the races. I have all of you to thank for that.
Now the ideas;
-This year's lagger next year's winner CSCO
Go long Jan 2012 20 Puts @ 2.63 Go long CSCO @ 19.55 Being long the put gives you the leverage and protection for a whole year, to give the stock time to make a move.
You could own 100,000 shares for $263K with portfolio margin ! Sooner the stock moves the more you make (time decay)
-Sell contango Buy backwardation
You could never go wrong if you accept the truth, Index funds always roll and specs dont take physical delivery. This cant be more true in Cotton.
Right before Index roll dates (it is widely published) sell front month buy back month especially when it is giving you almost -30 to do so Sell March CT Buy July CT pyramid this trade untill the roll date (sometime at the end of Jan or begining of Feb) when they are almost done rolling(watch the shift in open interest) close out and Buy May CT sell July CT wait patiently for it to play it out again untill the next roll.
- Leveraged ETFs suckers play!
Two ways to play this one out if you could borrow and sell short, short both FAZ and FAS equal $ amounts since the trade is neutral, execute this trade almost free of margin. One thing is for sure to stay even long after we are gone is volatility and triple leveraged products melt under volatility!
If you cant borrow the shares execute the trade using Jan 12 options to open synthetic short positions. This trade works with time and patience!
Vic, thanks again for providing a platform to listen and to be heard.
Phil McDonnell writes:
When investing one should consider a diversified portfolio. But in a contest the best strategy is just to go for it. After all you have to be number one.
With that thought in mind I am going to bet it all on Silver using derivatives on the ETF SLV.
SLV closed at 30.18 on Friday.
Buy Jan 2013 40 call for 3.45.
Sell Jan 2012 40 call at 1.80.
Sell Jul 25 put at 1.15.
Net debit is .50.
Exit strategy: close out entire position if SLV ETF reaches a price of 40 or better. If 40 is not reached then exit on 2/31/2011 at the close.
George Parkanyi entered:
For what it's worth, the Great White North weighs in ….
3 Markets equally weighted - 3 stages each (if rules allow) - all trades front months
3 JAN 2011
BUY NAT GAS at open
BUY SILVER at open
BUY CORN at open
28 FEB 2011 (Reverse Positions)
SELL and then SHORT NAT GAS at open
SELL and then SHORT SILVER at open
SELL and then SHORT CORN at open
1 AUG 2011 (Reverse Positions)
COVER and then BUY NAT GAS at open
COVER and then BUY SILVER at open
COVER and then BUY CORN at open
Hold all positions to the end of the year
3 JAN BUY PLATINUM and hold to end of year.
. Markets to unexpectedly carry through in New Year despite correction fears.
. Spain/Ireland debt roll issues - Europe/Euro in general- will be in the news in Q1/Q2
- markets will correct sharply in late Q1 through Q2 (interest rates will be rising)
. Markets will kick in again in Q3 & Q4 with strong finish on more/earlier QE in both Europe and US - hard assets will remain in favour; corn & platinum shortages; cooling trend & economic recovery to favour nat gas
. Also assuming seasonals will perform more or less according to stats
If rules do not allow directional changes; then go long NAT GAS, SILVER, and CORN on 1 AUG 2011 (cash until then); wild card trade the same.
Gratuitous/pointless prediction: At least two European countries will drop out of Euro in 2011 (at least announce it) and go back to their own currency.
Marlowe Cassetti enters:
FXE - Currency Shares Euro Trust
XLE - Energy Select
BAL - iPath Dow Jones-AIG Cotton Total Return Sub-Index
GDXJ - Market Vectors Junior Gold Miners
AMJ - JPMorgan Alerian MLP Index ETN
VNM - Market Vectors Vietnam ETF
Kim Zussman entered:
long XLV (health care etf; underperformed last year)
long CMF (Cali muni bond fund; fears over-wrought, investors still
need tax-free yield)
short GLD (looks like a bubble and who needs gold anyway)
short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than
The traditional explanation of a high put-call ratio was panic by the uninformed public. With the S&P 500 at a two-year high today, that scenario seems quite unlikely. Using another method to evaluate the little guys, the non-reportable positions in last week's COT report were net long 3.4% of the S&P 500 open interest (weighted average of bigs and e-minis). The non-reportable net long position has ranged from 0.9% to 5.2% in the past year.
Alston Mabry comments:
IMHO, the relationship between the ratio of leveraged-long instruments to leveraged-short instruments on the one hand, and the market on the other, went through a regime change this summer after the Flash Crash. To paraphrase Wally Shawn in The Princess Bride: "I don't think that means what I thought it meant."
William Weaver writes:
To pose another question to the list: What types of events can cause a regime change in a financial instrument?
To stick with equities, I use consumer spending data to define high vol and low vol regimes as I have found these fundamentals precede market action (not survey data).
Of my three business partners, two who have created models that best my own and use only price, volume, and open interest data.
Composition of OI? i.e. Commitment of Traders? Larry any thoughts on how a strategy may only work with one demographic instead of using the demographic as a signal itself? Maybe ICI data with fund holdings?
There was a company a few years back that suggested lookback periods consisted of all the data where a detrended version of price stayed within a standardized range, thus the last spike was the end of the prior regime. The flash crash could be a part of this.
Regulatory/mechanical changes: fractional to decimal, up-tick rule, naked short rules, no short rules, required reserves, etc.
So this gives us a few starting points: fundamentals, price/volume/OI related observations, demographic of a market, regulatory/mechanical, sentiment data and major dislocations in price (I believe this should be separated from the price category).
David Aronson replies:
With regard to your question. We have recently added a type of modeling that searches simultaneously for an indictor to define distinct regimes (2 or 3) and then linear models that are optimal in each regime (distinct range of the regime indicator). I have not done much with it yet but we were motivated to add this tool because of the phenomena that you talk about in your post.
November 5, 2010 | Leave a Comment
Attached: graphic with SPX in the upper pane and the number of observations in the past month (21 days) where the SPX beat the Nasdaq and the Dow, divided by 21.
The divergence today is very interesting. Graphic as of November 4, 2010. If today continues this will be the first time we've had nine winning closes in one month since the beginning of the year and prior to that since DEC06.
Not something I would trade; just think is interesting.
The realization is is often faster than the anticipation. Or as they say in chess "the threat is worse than the execution".
William Weaver adds:
And many times less satisfying.
Anatoly Veltman writes:
Yes, I always remembered that one, since my coach mentioned it when I was 6; but I couldn't quite implement till I turned 12– and only then won first title.
David Hillman writes:
Like Fedex next day air. More often than not, when we ship coast to coast and the client says 'email the tracking number', I say 'you'll have the package before you have the tracking number'. Given system limitations, human intervention, variance in 'normal business hours' and time zones, Fedex makes it possible to physically move a package 3000 miles faster than we can get tracking data to the client electronically. One of the more satisfying examples of 'rapid realization'. Any market parallels?
Every system has a weakness. Where or what is it? Each human has a weakness. Each argument has a weakness. Financial systems have weaknesses. Financial models have weaknesses. The last one was the mortgage system generation and securitization and rating system. That was so big no one saw it. Governmental systems have weaknesses. The prior Greenspan put was good example of a system gone bad without realizing it. This is a good place to look for the weakness in the current situation. I can't put my finger on it exactly, but this government intervention cannot help but have some very unintended consequences. Governmental incentives are not properly aligned. The caliber and tenure of government workers is low. They are rather short term and incentivized to stay in power. In China, acknowledging one party system weakness, the tenure issue is improved. It is important to know your own weaknesses and the weaknesses of the model you use for survival and defense. It is good to know the weakness of your enemies, and those of the markets or system in which you engage.
Finding weakness is difficult without lengthy understanding, study and experience. Self delusion makes analysis very difficult. The lengthy time period of the play out of over 4 years is difficult for humans to comprehend. The comprehension of humans does not extend much beyond 3 or 4 years into the future at the most.
Ken Drees asks:
Can you expand on the 4 year time frame–not sure what this is.
Jim Sogi replies:
When you began high school could you imagine or picture yourself as a Senior? As you began college, did you imagine your self working? Can politicians, economists, market speculators conceive 4 years into the future, much less remember 4 years ago. Some deceive themselves that they can, but it is hard. Humans seem to lack some capacity for time periods in excess of 3 years. The Bible makes it 7 year cycles, but the 4 year cycle is based on my poorly articulated 4 year phenomenon. Another explanation is there are just too many variables.
William Weaver writes:
SWOT was a big part of my corporate strategy class in undergrad and I think it holds a lot of water with regard to analyzing trading strategies, governments and other systems as well as companies.
If I remember correctly it was HBS professor Michael Porter (I think there are two; one at HBS in corp fin and another in the econ dept) who wrote two or three papers on the subject, offered through HBSP.
If anyone knows of energy companies that would like to display their products at the Wharton Energy Conference this year, please let me know. Stephanie Nieto, whom I brought to the Spec Party this year is hosting exhibiting companies.
Pitt T. Maner III:
It was nice to meet you and Stephanie at the Spec Parties. I am hoping to maybe get up to Boston with my friend Martin Conroy to watch him compete in the Head of the Charles and hope to see you there too if you go.
In thinking of the Wharton conference:
As one of those long shot, nutty, literally " Don Quixote chasing windmills", sub-penny investments I have a few shares in Helix Wind, HXLW.OB. They have an interesting technology "if " they can get it patented and improve on it. http://www.fastcompany.com/1683897/let-the-great-wind-spin
CEO seems to be a skilled marketing type fellow but the stock imploded last year and you can probably tell the way it is setup if it has any viability or chance to survive. But Helix Wind is an eye catcher, "work of art" concept that brings a product with a small footprint, low noise, efficiency from wind in all directions, etc. and I have seen Target for instance in S. Florida show interest in small, vertical wind turbines (fitted into their signs) to run power to individual stores and save on their electric bills.
On another note, large, diesel-powered, portable generators for businesses and condos in S Florida became much more more prevalent after Hurricane Wilma hit several years ago. Once winds hit about 50 mph you can count on the power to go off here in West Palm Beach for days if not weeks in some cases.
With respect to Canada the stocks that used to interest me were CFK (drilling mud and supplies and tool expertise) and the driller Precision Drilling (PDS). Those are business areas that require a lot of expertise and experience and offer significant barriers to entry. But probably would tend to favor PTEN and the beaten up offshore drillers—DO, NE, RIG, etc. and good old SLB now as stocks to think about for slightly longer term given a potential rebound in energy and perhaps a return to more favorable regulatory environment. Definitely a boom /bust business cycle and one requiring much research.
Good luck with the conference.
It's quite rare that an important market both rises and declines 50% in a six-month period. It's even rarer for it to happen in a low-volatility, trend-following way. For a trend-follower, this is the sort of chart that pays for a thousand whipsaws.
I call this chart the "Revenge of the Turtles!"
(It's a screenshot of Lumber Futures.)
William Weaver writes:
I seem to remember someone saying lumber futures were not tradeable due to their illiquidity. Rocky, wasn't that you last February? A specific story about not using stop losses overnight as one would always be stopped out due to m@nipulation by the l_cals.
Since according to the regulators nothing adverse happened from a systems perspective [on May 6, 2010], are we to bake into our models the potential for a 50+ point swoon at any time and in vastly more compressed windows than ever seen before? The risk/return scenarios turn completely lopsided.
Riz Din asks:
I'm not familiar with the details of trading systems that may have been behind the move, but if they are just as happy buying as selling, can we then assume that there is an equal chance of a similarly mammoth sized swing to the upside?
William Weaver writes:
I doubt we could ever see the same type of vol to the upside simply because we're dealing with much more than computers, we're dealing with humans. Prospect Theory states that an investor who realizes a gain and a loss of equal magnitude will value the loss as much as twice that of the equivalent gain. This can be graphed by plotting the one day changes in the SPX on the x-axis (gains function) and the inverted one day changes of the VIX on the y-axis (value function). After calculating a least squares regression on both the positive days and the negative days (individually; two regressions) it is apparent that the slope of the losses is steeper than that of the gains.
We would need the entire world to be stuck short to see that kind of vol. But it would be fun to trade– of course I say that with a caveat; yesterday was a hell of a lot of fun to trade… after the fact. During it was survival even if you were raking it in!
Setups for indicies based on technicals will be correct just often enough to keep the players coming bask again and again using the same setup, similar to the biggest casino money makers, slots. The bells ring with small wins to draw the public in. Chartists always on TV and the internet showing the win based on some pattern are guaranteed to lose the next time.
William Weaver responds:
Mr. Miller makes a good point about only having to be right enough times to make the players come back for more. But I would argue that technical setups– whether they are or are not profitable– never have to be profitable for traders to attempt them. We all know that we as humans try to create patterns in all the data around us because pattern recognition in any type of data (reading for example) is how humans function, form memories, etc. Neuro-scientists feel free to attack me, but my point is not how the brain works but rather that we all show hindsight bias and recognizing a pattern in historical data is much different than recognizing one in real-time data. Even walk-forward practice is hindered by look ahead bias (we can all paint the past 20 or more years of SPX data) and a lack of emotional stress (endowment theory, prospect theory, loss aversion, disposition effect, etc.). What looks easy, coupled with success stories fueling hope, is always a trap.
February 24, 2010 | 1 Comment
HOJ0 [NYMEX heating oil April 2010] is up 35bps while CLJ0 [NYMEX crude April 2010] is up 138bps. More impressive is the fact that crude has retraced all of yesterday's losses while heating oil is fighting to break even.
Round number hypothesis: APR crude reverting back to 80 while there is no real trigger price for heating oil?
Not sure it has anything to do with inventories since the initial reaction was lower.
February 9, 2010 | 6 Comments
Brain Basics: Brain Damaged Investor from Inside the Investor's Brain by Richard L. Peterson
According to a 2005 Wall Street Journal article, "Lessons from the Brain-Damaged Investor," brain-damaged traders may have an advantage in the markets (1). Study participants who had a brain lesion that eliminated their ability to emotionally "feel" were compared against "normals" in an investment game. The chief researcher, Professor Baba Shiv (now at Stanford University), used a mixed sample of patients with damage in emotional centers including either the orbitofrontal cortex, the amygdala, or the insula.
In Shiv's experiment, each participant was given $20 to start. Participants were told that they would be making 20 rounds of investment decisions. In each round, they could decide to "invest" or "not invest." If they chose not to invest then they kept their dollar and proceeded to the next round. If they chose to invest, then the experimenter would first take the dollar bill from their hand and then flip a coin in plain view. If the coin landed heads, then the subject lost the dollar, but if it were tails, then $2.50 was awarded. On each round, participants had to decide first whether to invest. The expected gain of each dollar "investment" was $1.25 (average of $0 and $2.50), while each "not invest" decision led to a guaranteed $1. The expected value of the gamble being higher, it was always the most rational choice. Thus, one might assume that subjects always "invested" in order to make more money.
In fact, the results are not uniform. Normals (without brain damage) invested in 57.6 percent of the total rounds, while brain-damaged subjects invested 83.7 percent of the time. Many normal subjects (42.4 percent) were "irrationally" avoiding the investment option. Following an investment loss in the prior round, 40.7 percent of the normals and 85.2 percent of the patients invested in the subsequent round. After recent losses, normals invested 27 percent less often. They became even more "irrationally risk avoidant" after a loss.
Of the patients with different brain lesions, the insula-lesion patients showed the leas sensitivity to risk, investing in 91.3 percent of all the rounds and in 96.8 percent of the rounds following a loss. As a result, it appears that the insula is one of the most important drivers of risk aversion. Without an insula, brain-damaged patients were more likely to "invest."
On the lighter side, neurologist Antoine Bechara ventured that investors must be like "functional psychopaths" to avoid emotional influences in the markets. These individuals are either much better at controlling their emotions or perhaps don't experience emotions with the same intensity as others. According to Professor Shiv, many CEOs and top lawyers might also share this trait: "Being less emotional can help you in certain situations." (2)
1. "Lessons from the Brain-Damaged Investor" Wall Street Journal, July 21, 2005.
2. Chang, H.K. 2005. "Emotions can Negatively Impact Investment Decisions" (September). Stanford GSB.
Newton Linchen replies:
Larry Williams teaches that we shouldn't try to "improve" our personality regarding trading and emotions. There are "emotional guys" and there are "cold guys". Being an emotional type and trying to become cooler is another problem to solve, and the markets gives us already much trouble to work with. So, he says in his books that we should only recognize "what type" of people we are, and develop our trading style accordingly.
Pitt T. Maner III comments:
With the availability of more and more powerful software programs for the average Joe, will the human element eventually be less of a factor? One for instance can play a very mean game of chess without being a grandmaster by using a powerful program to suggest moves. There are tournaments where this is allowed—man/computer chess. http://en.wikipedia.org/wiki/Advanced_Chess So could it be that there will be a move towards very advanced "cyborgian" arrangements in the future. Not necessarily more profitable but less emotional–more algorithmic. It seems the younger generations are more trusting of technology to solve all problems, and as costs come down on the technology and software, will there be a pull to use methods similar to those now employed by professionals? Can one become competitive by using a "crutch"? Mr. Schnytzer noted a couple of years ago, " My guess is that with Deep Blue at your disposal, you'll beat Nigel easily at chess, but won't improve on your options trading profitability." Of course there is a company, however, using the Cyborg name that promises (for a small fee) to bring all this to the common investor…but does it work, or with increasingly advanced software can it work in the future? http://www.businessinsider.com/cyborg-trading-promises-hft-solutions-for-joe-trader-2009-11
Kim Zussman comments:
'We should only recognize "what type" of people we are, and develop our trading style accordingly.' Up to and including not trading. The idea that anyone can learn to trade successfully can be checked by asking yourself:
1. Could you learn to play competitively right now in the NBA , NFL, or national league?
2. How long could you stay conscious in the boxing ring for your weight class, or with an opponent twice your size (SEC says no guns allowed)?
3. If trading can be taught, why do most fail?
4. If a scientist, by definition shouldn't you be too quick to abandon convictions, and therefore vig-out with overly-tight stops?
Rocky Humbert responds:
The answer to Kim's question #1 and #2, as posed, is self-evident.But there may be flaws in the question. No one can just walk onto a field and play pro ball. Likewise, no one can walk into an operating room and perform open heart surgery. However, must people can (assuming they are able-bodied and mentally capable) invest thousands of hours and achieve some reasonable level of proficiency in most activities. A reasonable level of proficiency, does not mean being Derek Jeter, Tiger Woods, Christian Barnard, Buffett, Soros, Steinhardt and Robertson. Fortunately, one does not have to be in the 99.999999% percentile to be deemed a non-failure — or almost every reader (myself included) of this email would be over-dosing on anti-depressants! On #3, Why is there any reason to think that the percentage of traders who fail is any more than the percentage of entrepreneurs who fail (90%), or the number of people who drop out of the 36-week Navy SEAL class (70+%)? Competitive, high-risk activities always have a high drop-out rate. But, most of these people find their calling and are productive members of society…even if they can't throw a 100mph fast ball.
Jeff Watson comments:
I've often wondered where that meme of a 90% failure rate in trading originated. I see it in the literature, and hear it repeated all the time, accepted as gospel. Has anyone actually done a study to quantify this, or is the number just one of those numbers like Mitch Snyder pulled out when he quipped that "10,000 homeless people die a day".. And, what constitutes success in trading, what time parameter. Is success measured by return, by amount made, or by the ability of someone to grind out a small profit for 30-40 years, solidly in the black but never making a fortune?
Rocky Humbert replies:
Jeff's statement: "Is success measured by return, by amount made, or by the ability of someone to grind out a small profit for 30-40 years, solidly in the black but never making a fortune?" are great first questions. Regarding traders "failing," one should also consider a related data point: According to the BLS, the "average" baby boomer held 10.8 jobs from ages 18 to 42. 23 percent held 15+ jobs, and only 14% held fewer than 4 jobs. So, the "average" person changes jobs every 2 years. If one defines trading as a "job," then someone who does this, sitting in the same chair, for a long time is quite unusual compared with the population. see : http://www.bls.gov/nls/y79r22jobsbyedu.pdf
Kim Zussman comments:
No one can just walk onto a field and play pro ball. Likewise, no one can walk into an operating room and perform open heart surgery. However, must people can (assuming they are able-bodied and mentally capable) invest thousands of hours and achieve some reasonable level of proficiency in most activities.> My question is based on evidence like the article; supporting geneticaspects to behaviour, ability, gifts, and handicaps. Not everyone canbe trained to reasonable proficiency in the big leagues - and marketsare by definition among the biggest. Shouldn't traders ask themselves whether the reward/risk compensates the opportunity cost of thousands of hours of (potentially pointless)learning, if one may be (unknowingly) missing abilities needed toexceed results of buy and hold?
Peter C. Earle comments:
I am quite sure that this particular figure - 90%, sometimes shifted to 95%or even 99% - originated firmly in the late 1990s, when the SEC went afterthe SOES shops. They took, as their core example of the dangers, the exampleof one office of a particular firm which in a short amount of time morphedinto a general representation of the daytrading business (e.g., even the'prop shops' which were less focused on commissions than profitable trading)and was ultimately extended through word of mouth and the nascentblogosphere (e.g. message board jabbering) to cover any intraday tradingdone (online brokerage accounts, the occasional one day open/close, etc),and has since grasped the received wisdom of the collective mind at thispoint to an extent that it goes unquestioned. The fact is, the SOES traders/daytraders (as my man Lack will no doubtattest to) were mostly undercapitalized, out-of-work accountants andconstruction workers being sold 'maps to the gold mine', as it were. A better statistic, to start with, would be: with an $X account, after twelve months, how many remained?
Kim Zussman comments:
Interestingly, the author was as irrational as his subjects byfollowing the academic herd, making a low-risk, incorrect conclusion: "This study is especially relevant because of a concept called the"equity premium puzzle" that has long bemused financial experts. Theterm refers to the large number of individuals who prefer to invest inbonds rather than stocks, even though stocks have historicallyprovided a much higher rate of return. According to Shiv, there iswidespread evidence that when the stock market starts to decline,people shift their retirement savings—that is, their long-term, notshort-term, investments—from stocks to bonds. "Whereas all researchsuggests that, even after taking into account fluctuations in themarket, overall people are better off investing in stocks in the longterm," said Shiv. "Investors are not behaving in their own bestfinancial interest. Something is going on that can't be explainedlogically." This study, 2005, was in the middle of a decade where bondsout-performed stocks, and the irrationally risk-averse were punishedby missing out on ruin.
Greek and Portuguese bonds are in a nasty spiral. Very little seems to be working in terms of convincing the markets to mop up some paper. Greece 3.7 2015 is now trading 86-86.5, yielding approx 6.6 pct and some long term Portugal bonds are down a point or so since yesterday. I don't think Europe is in any way capable of rescuing Greece, or anybody else for the matter; the virus will soon spread to Italy, as it suffers from the samle chronic high debt to gdp ratios as the afore mentioned countries. Thus the trade of the day could be long Bunds short Btps.
Jeff Rollert writes:
Would it be unreasonable to compare the inability of any country to act as the world's military police, and in a similar sense, one country being the worlds bank?
Seems like the ECB built a wing on their house with wood full of termites.
I've always enjoyed the science fiction writers observation that the world will never unite until there is a non-Earth threat. Perhaps that includes monetary unions.
Alston Mabry writes:
It used to be so simple: The Greeks would have a crisis, the drachma would fall, and the Neuro's would swarm down for sun and fun and economic stimulation. The Greeks then took the extra money and started another story on the house because they knew that keeping the cash was not a good long-term investment. You'd see half-finished buildings everywhere, bristling with rebar — just the local version of a savings account with a currency hedge.
Bruno Ombreux adds:
Have you been to Athens recently? That's exactly what they have. Half-finished houses. They don't even bother covering the concrete. I was told that it was for tax reasons. As long as the house is unfinished, there are no real-estate taxes. So they don't finish their houses. This is very creative.
Jim Sogi replies:
Same thing in Peru.
William Weaver comments:
I didn't attend either event, but I remember in 2003 when Athens hosted the FISA Junior World Rowing Championships and then in 2004 Olympic Games someone made a comment about how clean everything was. It wasn't until about a week into Jr Worlds that someone finally noticed the grass on the sides of the highway between the athlete village and the rowing venue wasn't grass, but a green tarp covering heaps of trash.
The state of the art rowing venue is to my knowledge abandoned today. It was also only finished one week prior to Jr Worlds, and no one thought to anticipate the mid-August winds that sweep the city. The winds created such waves that the Men's eights heats had to jump ship and swim their boats between 500m and 1000m to cross the finish. Finals were reduced from 2000m to 1000m. The Games were lucky and didn't have this problem.
But what about selecting cities in order to build athletic facilities that will help the community in years to come? I wonder if there is been any research regarding future price performance of munis issued to build venues for Olympic Games. Most venues go unused after the event.
Henry Gifford adds:
Another reason for the rebar sticking out the tops of buildings in some places is that they expect to build the building taller later, when money is available, but without a mechanism for collecting on debts there is little money available for lending, thus things tend to be paid for in cash, and built gradually. Here, with loans available, that strategy doesn't pay as well as borrowing the money to build a property to it's "best" economic use, as the cash flow is much worse on a partially built-on property - same land taxes, same land cost, lower return, higher hassle/permit costs for repeated small construction jobs.
Counted 58 jets over Christmas/New Year Week. Empty spaces. More small jets. This is thinner than prior years. It's still impressive to see a billion of hard assets parked there all shiny. The corporate guys probably can't use the company jets to fly their kids anymore. Some great custom paint jobs on the private jets.
Great waves over the week. The seasonals on waves are remarkably consistent with large global forces at play. No reason why markets should be any different.
There is really no such thing as randomness, only ignorance of real causes. The ancients attributed it to dieties.
William Weaver comments:
Kamstra, Kramer and Levi find in their 2003 paper "Winter Blues: A SAD Stock Market Cycle" that stock returns are significantly related to season. Their study examined equity performance during the six months between fall equinox (SEP 21) and spring equinox (MAR 21) for the northern hemisphere and the opposite for the southern hemisphere. Overall, stock markets underperformed in the seasonal summer and outperformed in the winter. As an example, the authors cite the returns of a portfolio invested 50% Sydney, Australia and 50% Stockholm, Sweden. From 1982 to 2001 the portfolio earned 13.1% annually. If the portfolio was rotated following darkness (SEP-MAR = Stockholm; MAR-SEP = Sydney) the portfolio returned 21.1% annually. Following the light (opposite above) the portfolio returned 5.2% annually. — Paraphrased from Inside the Investors Brain, Peterson
I ran the numbers through present and found significance using a sample of two means. The recent returns are less impressive; L/S is possible to create long term AR.
Also, are we able to understand all confounding variables given our position within the system? I'm going to open a bucket shop on the moon. No inter-sphere communication, just observation. The shop will be open to moon people with no connection to Earth.
Phil McDonnell replies:
Unless I totally misunderstand the point of the paper it shows that the strongest return in the US comes in Jan following a sharp rise from Oct through Dec. The weakest monthly return is Sep, which neither corresponds to maximum sun nor minimum sun. Apparently the claimed effect is that minimum sun causes us to buy stocks. This is not what I would expect if SAD is the true cause.
Also the claimed effect of a ten parameter regression explains only 1.1% of the variance in both US and Sweden. That does not give one much of an edge for ten parameters.
Henry Gifford writes:
Persons who have attributed aspects of human behavior to DNA/evolutionary related causes have noted that after 9 months in a relationship women ask for a longer term commitment, and then either receive it or move on.
William Weaver writes:
In the past four years I've ended four relationships in October or early November and started a new one in December or early January with the exception of one year where I started a relationship in June. Might this be influenced by weather/seasons or other variables that could influence behavior and thus financial market volatility?
You wake up this morning and have an extra $10 million dollars in your bank account. You call your banker and find out that your broker overcharged you for commissions and that the money is yours without taxes. Throughout the day you proceed to spend as much as you can; a new car… two new cars, an addition to the house that includes an indoor pool and of course gifts for your family.
You check your statement and find you still have $5 million left so you decide to invest in another hedge fund (you've managed to spend much more than $10 million in broker commissions so you've got a lot of investments). You are presented with the following list. Assuming you know nothing of the investment style or past performance of the funds, which fund would you invest in?
Intercept Capital Management
Alexander Hamilton Capital Management
Federalist Capital Management
Trafalgar Capital Management
Barkentine Capital Management
Bearing Capital Management
Royal Sovereign Capital Management
White Knight Capital Management
Rittenhouse Capital Management
VectorPoint Capital Management
Thank you so much! Any input you have is greatly appreciated.
Kim Zussman adds:
Tiger's Wood Decapitation Management
Tom Marks asks:
Is Prof. Sharpe involved with that outfit?
Sir Steve Redgrave was one of the best rowers in history. Apart from the amazing fact that he won five Olympic gold medals for Britain in five consecutive Olympics as a endurance athlete, he also won nine world championship gold medals, two silver world medals and two bronze, one at the Worlds and one at the 1988 Seoul Olympics where he doubled up in the coxless and coxed pairs! What a lot of people do not know about Steve is that he was a product of being in the right place at the right time.
Redgrave's first stroke of luck was attending a
comprehensive school in Marlow where he was fortunate enough to have an English teacher, Francis Smith, who was a member of the Marlow Rowing Club. Smith invited Redgrave and his three friends to come down to the boat house to try their hand at rowing. Steve, who is dyslexic and, by his own admission, not a good student, excelled at rowing. From the very beginning, his four dominated their competition. At the time, Redgrave, in a single, was so good that he would get bored racing other juniors. To make it more interesting for him, Steve would not actually row full pressure for three quarters of a race, but just paddle down the course, before turning on the burners and blowing away his competition!
The second stroke of luck for Steve was that Marlow was also where rowing coach Mike Spraklen lived. Spraklen is notorious in the rowing world for training his athletes too hard. Redgrave just ate it up! At seventeen, Steve left school and began rowing full time. He was so good he joined the Senior National Sculling Squad who were training out of Spraklen's back garden, which was beside the Thames. Redgrave would have been selected for the 1980 Moscow Olympics had it not been for the Junior rowing selectors insisting that he race at the Junior World Championships held in Hazewinkel, Belgium. They desperately wanted a junior crew from Great Britain to win a medal and Redgrave and his partner, Adam Clift, were odds on favourites to win gold. However, the crew were beaten into second place by an East German boat. Redgrave was so disgusted at his performance he threw his silver medal into the lake!
Over his career, Redgrave continually challenged himself by trying the impossible. For example, he would double up in the coxless and coxed pairs events at the Worlds! Not only would he have to qualify for the event by being the British national champion in both boats, he would also have to race the events back to back at the world championships. On a number of occasions, this meant that as soon as he had raced in one boat, he would have to immediately switch into the other boat, row down to the start and race again, against his rested competition!
It was not all plain sailing for Redgrave during his career, however. Apart from the niggling injuries he had to contend with through out his time as a rower, Steve was diagnosed with ulcerative collitis in 1992 and with diabetes in 1997. Just as he did with his competition, Redgrave was determined to dominate his illnesses and not let them affect his rowing performances. They became part of his "training" that had to be dealt with in order to win.
In retirement, Redgrave has transitioned very well into a motivational speaker and head of various charities. He is an inspiration to those who had the privilege of sharing the river with him and to those who look back at his legacy as an exceptional rower and living legend.
William Weaver responds:
Good rowers can be considered great only if they have mastered the single. I don't remember if Redgrave won the single at Henley, but I'm more inclined to attribute greatness to oarsmen like Lange, Muller, Kolbe and Karppinen who showed they were not only strong enough, but technically brilliant enough and mentally tough enough, to win the single. The pair is possibly the only shell as technically challenging (if not more so) than the single, but the meat lays with the toughness of being a single sculler.
If you're ever in Philly I'd be happy to host you at Fairmount or Vesper for a row and a beer; both clubs have bars — one great part of rowing in Philadelphia! Just don't visit during the winter — I've done my fair share of rowing in December and January and have suffered from frostbite twice, so I'm done with that!
Chris Cooper says:
I'm also a rower, though not active at the moment. Did 6:21.6 on the erg at CRASH-B in 2008, which was only 0.7 seconds off the world record for my age group (55-59 HWT), set in the same race. But I'm not very good in my single, having taken up the sport only recently. There's a long learning curve! Last year I convinced my mother to try the erg, and this year she turns 80 and is hoping to set a world record in her new age group, or at least take first place.
I haven't rowed in Philly, but I paddled there for several years on their world-championship dragon boat team, which is composed primarily of ex-rowers. The river is a beautiful place to row or paddle, but only when it isn't freezing.
Sam Humbert observes:
Chris Cooper rocks! His ~6:20 time (in his late 50s!) is equivalent to ~1:35 500m splits. Wow! My 38-yo trainer, who's a longtime weightlifter and quite fit, can do 1:35 for a single 500m — then he's toast. Me, at age 48, and moderately fit, 1:45…
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