Jul

1

In the old days when I used to trade ag futures, about once a year I would see total unanimity of signals. Grains, meats, sugar, cocoa, etc. would all give the same signal at the same time. For example, they would all give a buy signal, such that I would think to myself, "holy mackerel, these markets are going to explode". But the total unanimity was a fake as the markets would stutter and then all drop. I was never bright enough to conjure up a reason why it happened, but it did.

Recently all of my financial market indicators gave sell signals. Stocks, Bonds, REITs, Gold. And the sell signals were everywhere. Momentum, behavioral economics, actual volatility, actual volatility of implied volatility, and some bizarre stuff you would never think of. You name it and it was bearish. Even the fundamental stuff I watch like surrogates for employment and retail sales are bearish.

We are very mechanized traders, and when I get a bearish signal for equities, I simply look to my overall rankings and see what to switch to. But everything was bearish, so there was really nowhere to relocate. However in looking at the rankings, equities were ranked higher than the competitors (e.g. bonds). So I had no choice but to stay in equities, being very selective and keeping every stock on a very short leash.
I have no idea why unanimity of indicators would negate the indication.

Any ideas? I don't see any flexion hands in this, but maybe others do.

One of the holy grails out there is to know how to forecast future co-movements between different assets. (As if forecasting just one isn't hard enough.) As it all starts to hit the fan, the correlations between all assets approach 1.0 at something much greater than an exponential rate…

My qualitative take on it is that the growth rate of the cross correlations as they inexorably accelerate towards parity approaches a certain velocity 'x' at which point, mathematically, we are as close to the asymptote as the 'system' can stand.

This is the 'going to the cliff and back again' phenomena that The Palindrome speaks of as a result of 'reflexive' interactions of market participants' expectations with the price and the price's effect upon the market participants' expectations. Arguably this is the ideal time for stabilising 'flexionic' behaviour (as opposed to shenanigans in TY around auctions et al.)

How they might do it, and more importantly time it, is a very deep question. For 'them' to have it figured out I think they would have to have figured out the actual underlying price generating process (what really moves prices).

Now, I guess only Renaissance Technologies' Medallion Fund has gotten anywhere near identifying the answers to that series of non linear questions. The most that one can say at this stage of the game is that the occurrence of substantial downwards co movements of assets tends to cluster (which is a 'warning sign' in itself) and for short periods after this clustering risk assets often make substantial minima. 

Steve Ellison writes: 

My first guess to Mr. Rafter's question is that, like a Higgs boson, unanimity in any market is very volatile, unstable, and unsustainable. As Richard Band wrote in a book about contrarian investing (doesn't everybody profess to be contrarian?), "If everybody is bullish, who is left to buy?"

To test this proposition, my first idea was to find instances in which the Investors' Intelligence survey of advisors had a 4-to-1 preponderance of bulls over bears or vice versa. There have been no such instances in the 2 years I have subscribed. I settled for instances in which either the bullish or bearish percentage was below 20%. There is typically a sizable group of fence-sitters predicting "correction", so the sum of the bullish and bearish advisors is much lower than 100%.

There were 10 recent weekly reports in which the percentage of bearish advisors was less than 20%. I get the reports on Wednesdays, so I tabulated the change in the S&P 500 futures from the Wednesday close to the Wednesday close of the following week.

Report             One week         Net
Date     Close     later    Close   change
3/13/2013 1550.00  3/20/2013 1549.00   -1.00
3/20/2013 1549.00  3/27/2013 1556.75    7.75
3/27/2013 1556.75   4/3/2013 1548.50   -8.25
 4/3/2013 1548.50  4/10/2013 1582.75   34.25
4/24/2013 1574.00   5/1/2013 1577.25    3.25
 5/1/2013 1577.25   5/8/2013 1628.75   51.50
 5/8/2013 1628.75  5/15/2013 1654.25   25.50
5/15/2013 1654.25  5/22/2013 1655.50    1.25
5/22/2013 1655.50  5/29/2013 1647.00   -8.50
5/29/2013 1647.00   6/5/2013 1608.00  -39.00

Average                                 6.68
Standard deviation                 25.31

Considering that the average net change during my subscription has been a gain of 3 points per week, I get a t score of 0.46, which is not only insignificant, but has the opposite sign of what my conjecture implied, i.e., that low bearishness is bearish.


Comments

WordPress database error: [Incorrect file format 'wp_comments']
SELECT * FROM wp_comments WHERE comment_post_ID = '8479' AND comment_approved = '1' ORDER BY comment_date

Name

Email

Website

Speak your mind

Archives

Resources & Links

Search