In our shop we consider ourselves "data monkeys" rather than quants, hoping that the disrespect of the moniker will limit wannabees. But if it looks like a duck and walks like a duck…

The problem of ever changing cycles/ figuring out the current regime/ the Church of What's Working Now is solved by most in a brutal fashion rather than a subtle one. Suppose you drive an old car from sea level to say 12,000 feet and it struggles. You could lift up the hood and tear the engine apart. You could also make an air-intake adjustment. Both methods work.

We data monkeys believe that the only things that count with regard to markets are sentiment and momentum. That is, it's all behavioral, and it's reasonably efficient. Sure we like to comment on fundamentals, but the fundamentals to us are only important because they influence the behavioral. When a market has been moving in a certain regime, sooner or later a market Watcher gets the inkling that a change is afoot. His action or inaction will disseminate exponentially to others, and then the regime really will change. The key to keeping up with this is to watch what the Watchers are watching.

To us this means that if you are monitoring data with human input (e.g. price) you had best be making your inputs adapt to what they are watching (i.e. usually the length of past data) and it should have an exponential component to it, rather than linear because human knowledge moves exponentially. If the in-crowd has switched to watching the last week and you are watching the last two months, a change will occur before you become aware. Non-human influenced data (e.g. most fundamentals) can be fixed and linear.

Rocky Humbert writes: 

Roy Niederhoffer wrote a prescient piece 3 years ago. It's worth re-reading this as I think he makes some excellent observations: "CTAs Could Face Historic Challenges From Rising Rates"

anonymous writes: 

Roy Niederhofffer's piece points out that the structure of futures markets for interest rate futures has favored those that didn't expect rates to rise. A large portion of the earnings of investors around these markets would make money because futures had a bias to be priced with an expectation of higher rates than eventually occurred. Those who took the bet that rates would rise lost, and the reverse. We've had a long run of this bias back to the rate peak in 1980/82. Certain types of investors made better than market returns because of this.

The source of this has been Fed led by their providing excess liquidity, and making pronouncements that they would continue the low rates so carry trades would transmit low Fed funds rates to other instruments. THese low rates provide under pinnings for other business investment, and for increasing stock multiples as the only game in town.

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