In an article today about Pimco they disclosed that they prefer holding bond futures as opposed to cash bonds. The logic being that since futures only require a good faith margin they can deploy excess capital into higher yielding shorter term corporates for the interest payments. The futures positions are used primarily to capture any price movements on bonds. They hold a $63 billion position in 5, 10, 30 year futures which I calculate represents roughly 11% of the open interest and every quarter they would need to roll 630,000 contracts.
Jonathan Bower writes:
One of the huge trades I remember them making many years ago on the floor was selling 30-50k out of the money puts on US and TY. They did this several expirations in a row. The rationale was they could capture the premium and if the market went down they'd take delivery at their line in the sand. Perhaps it is an efficient way to put on size at a target level.
Bonds trade up ~ 5 points, 130-15 to 135-23 in a few seconds, and then the market trades both sides for close to a minute. Certainly enough time for someone who "points and clicks" to take advantage of the "mis-pricing", on the way back down, and now they've canceled all trades above 131-12….
"It was a fat finger"
If that were true then there would have been an instant return to prior trading levels without two way action. It took close to 20 minutes to go back to the prior levels with many up and down ticks.
I'm sure all the little guys who (thought they) bought back their shorts at 131-00 are really happy it's trading at 130-10 now that they're stuck with their longs….
When people talk about market efficiency, they are talking about two different concepts. In one sense, the market can be said to be efficient if no one can consistently outperform the market based on skill. A somewhat weaker form would be more lenient when it comes to consistency. Some would be expected to outperform just based on random luck. If some outperform it, it can't be said for sure that it might not have been based on skill rather than just on luck.
The other sense of efficiency is that the market price is a good judge of the true fundamental value of a security. If this were the case the overall market would not be a volatile as it is. In an efficient market in which the market was indeed a good judge of fundamental values, the annual market return would not deviate much from the long-term required return on the market. All factors that influence value would be correctly evaluated and priced into the securities. But we are not good at forecasting the future. Let us say an unexpected recession hits the economy. We know we will have recessions. The unexpected nature of that recession might just be a matter of timing. But say it is an additional recession. It would mean a year of disappointing earnings, and one would expect the stock to decline by the amount of earnings shortfall. Now if there was a change in the assumption about the nature of the economy it might also require a change in risk premiums demanded. But this occurs much too frequently to blame that. If one does what Hetty Green did and buys in panics and sells in booms, one could do well. The problems come in that the market in this that there are too many factors in the future for any to forecast correctly and psychology influences markets in shorter time spans as do liquidity premiums. If the market deviates from efficient values in this sense, someone who could consistently forecast fundamental values could still fail to outperform because they cannot forecast how much the market will deviate from that true value. They might not have the staying power hold out until the market does return to that true fundamental value. Clearly this becomes more of a problem the shorter one's time horizon. In the very short time span of a trader, fundamental values might have little importance and other market factors might be dominant. Then only the first definition of market efficiency would have any relevance.
In sum, I ask the question are the markets efficiently smart or efficiently stupid and conclude the latter is more likely than the former.
Jonathan Bower writes:
I'd say markets are efficient depending on your time frame and expected holding period. For every fundamental investor that sees a "fair" price, there are a dozen other participants who see a mispricing and vice versa.
My parents always send a box of honeybell oranges while they snowbird in Florida to escape the midwest winters.
While fresh squeezed OJ is always an enjoyable indulgence, honeybells take it to a whole other level. I highly recommend partaking should one ever get the chance.
Jeff Watson writes:
I have a honeybell tree, and OD on them during season. while the honeybell OJ is the best in the world, it also makes the best screwdrivers and orange ice cream.
December 12, 2011 | Leave a Comment
Mr. Pennington’s link to Morningstar’s analysis of RSP , the S&P 500 equal-weight ETF got me to thinking… Morningstar’s conclusion was that RSP’s returns are explained by mid-cap stock returns. Stated another way, the *performance of an equal-weight large cap portfolio is explained by mid-cap performance* (?!?!?). It seems rather cavalier to dismiss a huge swath of a large-cap index and say that those are really just mid-cap stocks. It’s been a while, but I certainly don’t remember any “premium” based on size for mid-cap stocks. So what is driving the recent outperformance? Is it possible that the converse is true? Perhaps mid-cap performance is really a proxy for equal-weight portfolios regardless of size. I hypothesize it has more to do with portfolio/index construction rather than uniqueness of size. So I need to find a way to measure a portfolio’s construction and figure out if size matters.
Since I was interested in examining how the portfolio/index is weighted I took a look at S&P 500 and the S&P MidCap 400. Since both are capitalization weighted they tend to be “top heavy” in that the largest capitalization stocks get more weight in the index and subsequently have a much bigger impact on performance. But just how top heavy are they?
*S&P MidCap 400*
Top 10 Holdings of Index
Ratio to Equal-Weight
The S&P 500 is almost 10x top heavy relative to an equal weight portfolio. This indicates that the S&P MidCap 400, while not an equal-weight portfolio, “looks” much more like one than the S&P 500 and this could explain, in-part, the similarity between mid-cap stock performance and large-cap equal weight performance. As an aside, I thought it would be interesting to see the evolution of “top-heaviness” in the S&P 500 since I have some historical data. Using quarterly constituent data from Q2 1995 -Q3 2010 of the components of the S&P 500 I computed the weight for each stock in the index based on their market capitalization relative to the total market capitalization of the index at the beginning of each quarter. I then computed the skewness.
Back to the question at hand; I wanted to determine if size is driving the performance difference between an equal-weight and a cap-weighted portfolio or if it was due to how the portfolio/index was constructed. I decided to calculate the weighted-average correlation within a portfolio to see if there was any relationship between how “well” it was constructed. I think of this as a crude measure of how “diversified” a portfolio is, with the implication that severely skewed weightings are sub-optimal and lead to higher correlation while equal-weights by nature are more “diversified” (in a naïve sense) and that’s what is driving performance. Since I needed to look “inside” a portfolio to compute this statistic I collected the daily 100 portfolios formed on size and value from the Ken French website (it was easy and free). Using the daily data I formed non-overlapping equal-weight decile portfolios for size with break points based on both value and equal-weighting over a 62 day period. Why? Well, it’s close-ish to a quarterly period and I had to use excel so it was semi-painless and it made the weighted-average correlation calculation easier. A more careful study would actually look “inside” each of the 100 portfolios themselves. I computed the log return and the weighted average correlation within the portfolio during these periods to create a time series beginning in 1963. I report the summary statistics for the 10 decile portfolios (“quarterly”) return series.
It turns out that all of the portfolios look about the same in that the portfolio weighted average correlation and returns are clustered and there is no meaningful relationship. The one exception is the equal weight small decile which shows superior return characteristics. So to re-cap: forming a portfolio on size leads to portfolios that all look similar from both a portfolio/index construction and return perspective. Since there is no meaningful difference in returns based on size, and as noted before, the characteristics of the portfolio/index construction are similar it at least provides two data points to start questioning Morningstar’s explanation of causality. It’s not a slam dunk, but it’s a start of what could be more rigorous analysis. But wait, since I had already gone to the trouble to test “size” I thought I’d take a peek at “value”.
Lo and behold. The deeper the value proposition the lower the portfolios weighted average correlation and the higher the returns. While it’s a small sample there is clearly a strong relationship between portfolio construction (as measured by this metric) and return, certainly stronger than I would have thought ex-ante. The portfolios formed on equal weight breaks also dominate the value breakpoint formed portfolios, another piece of evidence in support of the original question. Of course on reflection this result makes intuitive sense. Growth portfolios are primarily driven by the same factors, which are largely systemic and therefore more highly correlated, whereas value portfolios tend to have more idiosyncratic risk so they should have a lower weighted average correlation within the portfolio. It is sometime easy to forget that portfolio construction is just as important, if not more so, as security selection. So now my question becomes; do the returns from value-investing accrue because it’s “value” or because they are “better” built portfolios or is it some combination of the two? Which came first, the chicken or the egg?
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.
It is refreshing to experience mythology in real-time. Yesterday, CL stop running was near picture perfect, acceleration through resistance, a short reversal and pause to retest, then a sharp move to take out the next.
But then again, describing a chart formation as being a resistance or support is subject to one's perspective. For clarity, support should replace resistance.
Victor Niederhoffer writes:
One must not forget the ecology of markets. All related. Down big in so many has gravitational and equilibrating return.
Jonathan Bower comments:
Overnight CL trading reminded me of this Simpson's episode. Enjoy.
John W Henry, is trying to turn the fortunes of English Premiership team Liverpool, after being a success across the pond at the Red Sox. In a interview in The Guardian, he disclosed a few points in his battle which may be of assistance to us. First, an extract from his trading thinking:
I don't believe that I am the only person who cannot predict future prices. No one consistently can predict anything, especially investors. Prices, not investors, predict the future. Despite this, investors hope or believe that they can predict the future, or someone else can. A lot of them look to you to predict what the next macroeconomic cycle will be. We rely on the fact that other investors are convinced that they can predict the future, and I believe that's where our profits come from. I believe it's that simple.
John W. Henry
On his battle with Liverpool, and strategies for a premiership:
1. That, he said, will be Liverpool's two-pronged approach to rebuilding the squad, which will be financed only out of its income; he and his fellow investors in Fenway will not be pouring cash in.
2. Henry, however, said this did not mean they were not prepared to spend big fees on the right players, as the group has done when turning the Red Sox into a World Series-winning baseball team again.
3. "We intend to get younger, deeper and play positive football.
4. Adding two top players "We intend to get younger, ………Adding two top players [Carroll and Suárez] who have just turned 22 and 24 is a good first step.
5. "It's not a coincidence that the last two ownership groups could not get a new stadium built," he argued pointedly. "What they proposed or hoped for just didn't make any economic sense6. Our goal in Liverpool is to create the kind of stability that the Red Sox enjoy," he said. "We are committed to building for the long term."
OK what does all that mean with respect to trading.
1. Invest from within. Generate cash from within other ares of your business, then use this to improve revenue in your core model (and fit under regulation framework in doing so).
2. Rio trade is alive and well! Well, at least investing larger on a proven strategy where the rest of the business model can fit around it. In fact, this might be the only way to take you over the line with some kind of speed, without grinding it out, and losing to the vig.
3. Do not expect to play defense and win. You must trade positively and add to positions when you can in an effort to score the match winner.
4. Law of ever changing cycles. Get fresh new ideas and strategies. Add to the old tried and true with fresh blood, since this will be where your future lies.
5. Do your books. Money management. Don't over extend on risk.
6. Your after stability in trading and low volatility returns over the long term… not in beating the morning star monthly genius.
Jonathan Bower writes:
I dunno, blowing GBP 35 million on an unproven and injured 22 year-old player with multiple arrests for assault, including his ex-girlfriend, (Carroll) makes much sense from a business or trading perspective.
December 17, 2010 | 1 Comment
Any Boy Scout who achieves his Eagle in 2010 not only gets an Eagle Pin, but this year, their Eagle Pin will even have a "100" on it to commemorate the 100th anniversary of the Boy Scouts.
If this site will indulge me to boast a little…….
Tonight, David had his Eagle Scout Board of Review and passed with flying colors. He is very excited about getting his Eagle pin with the 100th anniversary logo on it. He worked long and hard to achieve Eagle.
Those on this list that have met my son know that he is one of the finest of the rising generation.
I am honored and blessed to be his father!
David Brooks writes:
Hi everybody, this is David. Thank you everyone for the kind words on me getting my Eagle. My father asked me to give a short report on how I got my eagle and my eagle project.
Well the first year of scouting one works on getting first class. In order to get this there aren't any merit badges needed, its just stuff like getting enough camp-outs and knowing the scout oath, scout law, etc.. once a person achieves first class the new challenges are merit badges. In order to get one one has to work on the badge and meet with the counselor for that badge. A person needs twenty-one merit badges to be an eagle (plus the eagle project). I believe 15 of those 21 are not optional, one needs to get merit badges like: citizen ship in the nation, first aid, swimming, etc.. and 6 optional merit badges-one can pick six out of the over one-hundred optional merit badges. That is the relatively easy part.
Then work on the eagle project begins. After thinking of ones project and getting it approved from the organization one is doing it for the first step in this drama is begins. one meets with the eagle board with there proposed eagle project. they 'ingterigatin' of the persons eagle project and will hopefully approve it with only a few minor changes-on mine I only left out a few minor details on the report-. a typical eagle project a takes about twenty hours of the actual scouts time and about fifty hours of the troop and other volunteers time(all their time combined). On mine I spent about twenty-four hours personally and my troop and volunteers spent about fifty hours on the project. After this, one writes a report on the project and sets a date to meet with the final eagle board. I spent an hour and thirty minutes in the room with the scouting 'enthusiasts' and, thankfully, they passed me. This is just a brief overview of what one can do in scouting, but there are definitely many other things, enjoyable things like campouts, canoeing trips, the Klondike Derby-a sled race- but its not all just boring merit badges and writing reports, I have definitely enjoyed my scouting experience.
For my eagle project we picked up trash, planted twenty native MO trees, and built six wildlife bundles. My project was located on a flood plain and there was an abundance of trash that had been washed into the park from the previous flood. I instructed my team to make a police line and pick up all the trash in one quick sweep. then I instructed my team to divide into smaller groups and plant the trees. After this we built the six wildlife bundles which are basically six feet high 'teepee' like structures to house the small game in the area.
Pitt T. Maner III writes:
Coincidentally, I was going through some old books the other day and ran across my grandfather's Boy Scout handbooks from around the time of WWI. He was born in 1902. If you were able to learn all the things in the handbook you would have had a very good start on a practical education. I imagine that some of things you have to learn today are similar and perhaps some of the tasks remain the same.
Unfortunately I was pulled from scouting after the local troop asked for an extra donation. But I did participate long enough to help carve and build a small, hand-sized, wooden racing car that finished in 3rd place after running down a short ramp. It was a nice summer memory. Don't imagine that many kids do a lot of whittling these days!
Planting trees is a very commendable endeavor. You may be interested in the following organization. I have enjoyed doing a bit of field volunteer work with them– environmental preservation and restoration certainly is a great cause.
Jonathan Bower adds:
Congratulations David! As a fellow Eagle Scout I know the amount of time invested by you, your troop, and your family in this achievement. It takes hard work and commitment to achieve the rank of Eagle as evidenced by the fact that less than 2% of all Scouts have ever achieved this milestone. The lessons in life learned from Scouting will provide you with a solid foundation for great things ahead in your personal, scholastic, and professional life. Well done!
I've been reading the Laura Ingalls Wilder series to my 4 year old daughter at bedtime. I came across the nugget of wisdom last night in Farmer Boy.
He waited till Father stopped talking and looked at him.
"What is it, son?" Father asked.
Almanzo was scared. "Father," he said.
"Father," Almanzo said, "would you–would you give me–a nickel?"
He stood there while Father and Mr. Paddock looked at him, and he
wished he could get away.
Almanzo looked down at his moccasins and muttered:
"Frank had a nickel. He bought pink lemonade."
"Well," Father said, slowly, "if Frank treated you, its' only right
you should treat him." Father put his hand in his pocket. Then he
stopped and asked:
"Did Frank treat you to lemonade?"
Almanzo wanted so badly to get the nickel that he nodded. Then he
squirmed and said:
Father looked at him a long time. Then took out his wallet and opened
it, and slowly he took out a round big silver half-dollar. He asked:
"Almanzo, do you know what this is?"
"Half a dollar," Almanzo answered.
"Yes. But do you know what half a dollar is?"
Almanzo didn't know it was anything but half a dollar.
"It's work, son," Father said. "That's what money is; it's hard work."
"How much do you get for half a bushel of potatoes?"
"Half a dollar," Almanzo said.
"Yes," said Father. "That's what's in this half-dollar, Almanzo. The
work that raised half a bushel of potatoes is in it."
Almanzo looked at the round piece of money that Father held up. It
looked small, compared to all that work.
"You can have it, Almanzo," Father said. Almanzo could hardly believe
his ears. Father gave him the heavy half dollar.
"It's yours," said Father. "You could buy a suckling pig with it, if
you want to. You could raise it and it would raise a litter of pigs,
worth four, five dollars apiece. Or you can trade that half-dollar for
lemondade, and drink it up. You do as you want, it's your money."
Stefan Jovanovich writes:
August 24, 2010 | Leave a Comment
It was a pleasure coming to Junto a couple of weeks back and chatting with you. I've been very impressed with how easily it is to speak to people and how willing they are to share their thoughts and insights. It's a great resource. Finally, I wanted to say thanks for adding me to SPEC list; it seem to be wonderfully rich living dialog, and I am learning a lot, even if many of the conversations still are beyond my knowledge level at this point.
I've been thinking a bit about our conversation after dinner at Junto a couple of weeks back about how you might foster your son Aubrey's interest in things mechanical. You have done the obvious things of getting him all of the construction and science toy sets and the like. My dad was quick to notice my interest in mechanical stuff, and, to a large degree, really helped to get me to take the career path that I did. Thus here is a potpourri of other thoughts that I wanted to pass along to you.
Before I make my own recommendations, I thought I would pass along some thoughts from my father, who, by chance we visited last week in Ohio, and I asked him about his thoughts on your question. He said that with me he always tried to encourage exploring without being too quick to interject, e.g., in taking something apart with the very real chance that it will be broken for good. He felt it important to let the exploration process happen naturally with a minimum of intervention, with the idea that the child makes-and learns from-his own mistakes, trials, and tribulations. In essence, then, he took a Libertarian view.
In terms of my own thoughts, one thing that I bet Aubrey would really enjoy doing is taking some things apart to see how they work. Great candidates for this kind of thing include, in no particular order, kitchen scales, motorized toys especially with gears and such, CD, cassette or VCR players, old mechanical clocks, old inkjet printers or computers, and the like. He'll need some simple tools to do this with, and, of course, he would have to be supervised for many of these activities, but I would guess he would love the process of exploring and understanding as he takes things apart. I always did. I wouldn't be a bit surprised if he was able to get many of them back together again in working condition.
An interesting twist on the above would be to give him a simple object that doesn't work and see if he can fix it, preferably by taking it apart. I realize he's at a pretty young age, but it might be worth a try. You could even "rig" things so that the repair was fairly obvious, then gradually make it more challenging.
Another thought would be to take him to a museum of science and industry. My parents took me to the Museum of Science and Industry in Chicago when I was 11 or 12 and it changed my life:
I realize Aubrey is a little young, but this still could be a very impressive and entertaining experience for him. To that end, there is a children's museum of science and technology in Troy, NY. Here is a reference to the New York Hall of Science in Queens. I've never been there, but it might be worth a look. There may be several others in New York City, and would be worth looking into if you haven't done so already.
Consider also an aviation or automobile museum. There are some local, I believe. If you are ever in Dayton, OH, there is a spectacular military aircraft museum at Wright Patterson Air Force Base. Chris Tucker may know of others (as well as science museums for that matter; he has been to several around town with his kids).
Another simple thing to do would be to take him to a local hardware store like Home Depot or Lowes or even a craft store. There's a lot of fun mechanical stuff in those places, and they also have the raw materials to make all manner of things. If nothing else, it's easy to do and you could gauge his interest in various things to see what he likes most.
You mentioned that Aubrey likes structures. My all-time favorite structures are (in this order):
1. The Hoover Dam
2. Arch of St. Louis (Gateway Arch)
3. Eiffel Tower
4. Washington Monument
5. Sears Tower
A trip to any of these would probably be an absolute delight for him. Oftentimes these places will have museums on the structure, and you can get kits or books or videos at the local gift shops there that could further his learning and interest.
Other things to look for include films/and documentaries on the above structures. For example, I saw a very interesting show about a suspension bridge that was built in Europe somewhere (Norway maybe?) and they assembled the bridge section by section, building off of the previous sections. The film chronicled the building construction over time and also highlighted some of the technical challenges and behind the issues that the engineers faced. It was a great show.
Some other things that I have always been fascinated with, even as a kid, that he might also find interesting:
. Power plants - there is just about everything in one of these, and everything is super-sized.
. Mechanical Equipment rooms in buildings of all kinds with pumps, ducts, pipes, valves, gages, and control systems. To this day I still love this kind of thing.
. Water towers, especially the kind where the tank is suspended off the ground with legs - I can't tell you why I liked these so much, but I always did, and there was one close to our house in Ohio when I was a kid.
. Factories- again, there is just about everything here: robots, assembly lines, machining operations of all kinds, conveyer belts, hydraulics, pneumatics, electirc motors, sensors, etc. Factories are usually very densely packed, so you can see a lot in a small space.
. Dams- perhaps it's their sheer size, or the enormous amount of water that they hold, but there is something incredibly captivating about a dam. It's no coincidence that Hoover Dam is my single most favorite structure.
. Cars and engines - Underneath the hood of a modern car is a marvel of engineering. Just to see the belts turning and fans spinning might be very enjoyable. Obviously use caution.
. Bridges - I've always liked them, although they never captivated me as much as some of the other things above. Still, they are impressive structures, and there are a bunch around the greater New York area to have a look at. It might be worth looking into possible tours of any of the bridges.
Yet another great resource are any number of TV shows: There is one called "How It's Made", by the Science Discovery channel. that covers everything from soft drinks to fiberglass to fire hydrants. I've seen it several times and have enjoyed every show. Info is here:
Then there is the web. A site that I have sent my own students to on several occasions is called "How Stuff Works." They usually have nice graphics to describe all manner of devices and mechanisms. It might be a bit advanced for him now, but he could certainly look at the pictures and animations.
Finally, you mentioned in passing a tutor of some kind. One thought might be to hire an engineering student or physics student to spend some time with Aubrey, say once every week or two, or to come for a week during the summer. Many students post flyers offering their services for tutoring and the like around Campus, and they are always interested in making a few bucks. Columbia and CUNY have good engineering programs, as does Polytechnic. It would take a bit of effort to get the right person, but if and when you did, it could be a great experience.
All thoughts welcome. If I think of other things that would be useful, I'll gladly pass them along if interested.
Jon Longtin, Ph.D.
Associate Professor and Undergraduate Program Director
Department of Mechanical Engineering
Rocky Humbert writes:
Does anyone know whether there is a successor to "Things of Science?"
My parents subscribed my brother and me to this in the 1960s. Each month a little blue box would arrive in the mail with genuine hands-on scientific experiments suitable for children. It was a much simpler time (before the internet, etc.) but the program whet our appetite and contributed to our both pursuing engineering/science in college, graduate school and beyond.
Jonathan Bower adds:
This is one of my favorite "toys" for learning.
August 21, 2010 | 1 Comment
1st column: Date of first Hindenburg
2cnd: # of Signals
4th: Time Until
4/13/2004 (1) 5 5.4% 30 days
6/20/2002 5 15.8% 30 days
23.9% 112 days
6/20/2001 2 25.5% 93 days
3/12/2001 4 11.4% 11 days
9/15/2000 9 12.4% 33 days
7/26/2000 3 9.0% 83 days
1/24/2000 6 34.2% 44 days
6/15/1999 2 6.7% 122 days
12/22/1998 (2) 2 0.2% 1 day
7/21/1998 (3) 1 19.7% 41 days
12/11/1997 11 5.8% 32 days
6/12/1996 3 8.8% 34 days
10/09/1995 6 1.7% 1 day
9/19/1994 7 8.2% 65 days
1/25/1994 14 9.6% 69 days
11/03/1993 3 2.1% 2 days
12/02/1991 9 3.5% 7 days
6/27/1990 17 16.3% 91 days
11/01/1989 36 5.0% 91 days
10/11/1989 2 10.0% 5 days
9/14/1987 5 38.2% 36 days
7/14/1986 9 3.6% 21 days
Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days.
The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%.
Phil McDonnell comments:
The HO signal is negated when the McClellan advance decline oscillator turns up. It turned up briefly, hence no signal. This is the case even though the MCO has now turned negative again.
The probability of making money when you sell at the high of a given move and buy at the low is 100%. Now would someone kindly tell me when those are going to occur?
Jonathan Bower writes:
I'd like to know when they would occur too!
Phil's assumption is based on the notion that 100% of the position is in place at the high. If one were to follow a strategy (not suggesting that one should for any number of reasons) that added to the position as the market fell (perhaps one was not 100% sure it was the high?) and cover some of the position if a big enough pull back occurred (oops, maybe I'm wrong about this move), then one could get chopped up with sufficient vigor such that covering the entire position on the low would not generate sufficient P/L to cover the losses that occurred from over trading. At least that's one way you could sell the high and buy the low of a move and not win….
Phil McDonnell responds:
Perhaps I was a bit too indirect and subtle. The people who believe in the HO cite 'back testing' that is seriously flawed. Their back testing methodology requires perfect knowledge of the future. In order to duplicate the claimed results one would have to sell at the high and buy back at the low. And yes they are selling 100% at the high and 100% at the low but that is irrelevant to the broader issue of flawed analysis. This is very flawed because you have to know exactly when the high and low will occur (knowledge of the future).
Looking at results this way you need to ask yourself how often large drops occur at random. It turns out that they are a regular feature of markets. Then we ask the question whether these particular results were unlikely to be due to chance. Remember the distribution of highs in a random walk is controlled by the Arc Sine Distribution not the Gaussian. Same for the lows. The Arc Sine is a U shaped distribution which is ALL tails and not much in the middle. For a discussion of Arc Sine see Feller's An Intro to Probability Theory & Applications. Vol 1 deals with binomial random walks and Arc Sines and Vol 2 moves on to Normal random walks.
We all have an interest in not suffering through another day like May 6. And without violating our rule of never disseminating anything that is a meal for a day, i.e. a recurring regularity, perhaps you will forgive me if I attempt to open a discussion of how a day like May 6 where the market was at a minimum to start, open down and then went up and then dropped 110 points or more, a nice 10% to wipe out point– how such could have been predicted.
Ralph Vince comments:
What cost? If someone has stop orders in (fear of loss or missing a move to the downside), there is cost. If someone was, say, buying on a limit, it was a boon. If someone got shaken out of a position (fear) because they couldn't ride it to 0, I posit they were in too heavily. They were clearly people who were trading with money they could not afford to lose. (In my book, that makes them losers before they even put on the trade!)
Jonathan Bower writes:
I saw many parallels to "that" day on Wednesday. I'm curious if you all enjoyed Wednesday too…
Larry Williams replies:
I have enjoyed my luck which is soon to fade I suspect.
- September 2014
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Resources & Links
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