May

18

The Dow Theory, Big Cap, little cap, SPY/Russell, 2 factor theories are well tested on a variety of divergences. I think they work somewhat with interest curves as well.  I'm wondering about currencies, and countries. Would global/US, or small/big two factor model be predictive at all?

Bill Rafter writes: 

Two factor models work best when the two variables/inputs exhibit at least some negative correlation (obviously with changes, rather than levels). Equities v. Debt is a good example.

Also, we have noticed that in a competitive 2-horse race the overtaker is usually the first to move. That is, the buy signal in A is given before the sell signal in B. We have surmised this is because the smarter players start to acquire A while the complacent participants are reluctant to dump B until late in the game. Impossible to prove, but it makes some sense. This coincides with the experience that assets move up slower than they decline. As Matt Ridley puts it (Evolution of Everything), "Good things are gradual; bad things are sudden."


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