One was asked for the market lessons learned from the current bachelor Juan Pablo who didn't find a girl to get engaged to after dating 30 of them, and didn't have a persona except to say, "you're so pretty" to all the girls. Apparently he misled the losing finalist, and she walked away from him. Susan said that he proved the palindrome's adage about never marrying a girl you wouldn't wish to divorce when she told him off and he said, "thank goodness I didn't pick her."

I am usually good about finding market relations. But all I can think of is the person who looks at 20 different signals and announcements, and each one twists him a different way, and he can't make up his mind to trade at all or to get out of his position. And then there's the derivatives specialist who lures you into a trade telling you that you can buy or sell it at a vol of 28-29, and doesn't mention that the bid asked spread is 200%. There's also the dishonest intermediary who quotes you an interest rate of 5% with great leverage to get your account, and then once you have your position on says they're going to have to raise the interest rate to 10%. (all of the above has happened to me, and more). But in general, he was a man without a foundation, he reminded me of the scarecrow in The Wizard of Oz, the person that enters the fray without a raison d'etre, bound to lose. Thank goodness the fine women on the show didn't end up hitched to such a person. What other lessons can we learn from that reprehensible personage who tricked the producers into giving him a ring and a vacation, with the idea that he was seeking to find a woman to fall in love with.

Tim Hesselsweet writes: 

 When you said "a person who looks at 20 different signals and announcements, and each one twists him a different way, and he can't make up his mind to trade at all or to get out of his position", it made me think that
a speculator needs a rudder but sometimes the uncertainty is the source of opportunity. The following quote from Seth Klarman's Margin of Safety illustrates the idea:

"Most investors strive fruitlessly for certainty and precision, yet…investors frequently benefit from making investment decisions with less than perfect knowledge and are well rewarded for bearing the risk of uncertainty."

anonymous writes: 

To most people, uncertainty is instinctively regarded as something bad. But it simply refers to an inadequate mental state, which in no way can be tied to things good or bad. At most, it may mean that there is a probability that something bad could happen. But with that, one should never forget that it also means that there is a probability that something good could happen.

Gary Rogan writes: 

 The last statement probably applies more to long-term investments than short-term speculations simply because over the long time uncertainties do get resolved. Besides simply not having the information available at all, searching for precision among mountains of data seems counterproductive for things that can easily lose 90%+ of their value or go up 10x.

Ken Drees replies: 

A few weeks prior to the finale (unfortunately the ladies around my house watch this show), I saw a headline in a tabloid at the market that Pablo was a no-good. So the tabloid had him pegged.

Juan Pablo, reminds me of the dog who had two bones. A dog with a bone in his mouth goes over a bridge and sees his reflection in the water. What's that? A small dog with a big bone is staring back up at him, so in greed he opens his mouth to attack or get the bone and then drops his real bone into the pond. Greedy greedy makes a hungry puppy. Maybe JP just kept looking for a bigger profit till he ran his account into the ground.



 I am researching and reviewing my contact with hats over a not uneventful life. I am considering their value, their uses, their symbolic significance, the great people I know who have worn them, the hat corporation of America I bought as my first trade, the hat that Tom Wiswell always wore to prevent sunburn and cover up baldness, the hat that Shane wore that made him an icon, the hat that the accountant in Monte Walsh wore that Hat Hendersson just couldn't resist noting was just right for a pistol shot, the hat that I wear now to show my respect for those previous, the man I called Hats H.  because he always had a million different conflicts of interest while working for us. The importance of a hat outdoors in the West to shield from rain, sun, and the elements. Et al. What value do you see in hats these days? What anecdotes? They seem to have gone out of style because of the automobile. You don't need protection from the elements any more. Also they're hard to store. How do they relate to markets?

Alan Millhone writes:

Mr. Millhone

Dear Chair,

I remember well the hat Tom wore. The ball cap I wear has a board on it (see picture). The Market trader might wear such a hat to remind them to look ahead and make the right moves (trades).





Sam Marx writes: 

On the subject of "Hats". I am reminded of the aversion that John F. Kennedy had to hats and the picture that has stayed in my mind, since 1961, is of his carrying and not wearing his hat at his inauguration. I believe it was his attitude that caused the downswing in hat wearing in the U.S.

Tim Hesselsweet writes: 

 Seems like a good example of ever-changing cycles. The hat has been making a comeback for the last several years. Kate Middleton has become a popular figure and she frequently wears hats. Upscale department stores like Saks now carry a large selection of hats as well.

Alston Mabry responds: 

Yes, but…mens hats are a different dynamic:

Look at this photo of mens hats at a Liberty Rally in Columbus Circle, 1918, and mens Hats at the Horse Races 1920s style, and 1950s Men with hats.

Scott Brooks writes: 

When I graduated high school, the guy who measured my head for my mortar board said, "Young man, I've been doing this for 35 years and you have the biggest head I've ever measured".

 As a result of my freakishly large cranium, hats rarely fit me. I wear one from time to time, but only out of necessity, and occasionally for functionality.

Necessity is when I need to keep my bald head from burning in the sun or freezing in the winter or dry in the rain. Never under estimate the insulating and protective qualities of hair.

Functionally is because I need a hat when I hunt to keep the sun out of my eyes when I'm scanning for game, peering through my scope to place the cross-hairs on the shoulder of my intended quarry, or placing the aiming pins of my bow in the middle of said quarries chest cavity.

I avoid hats otherwise as I can rarely get one big enough to fit. If I wear one too long, it gives me a headache. Therefore, when it comes to trading, if you see me placing a trade while wearing hat, fade my position as I'm likely making a losing trade because my mind is clouded by the hat that is squeezing my brain all to tightly.

Pete Earle writes: 

I wear a hat, and have for seven or eight years. When I began to wear one, I expected to be lightly razzed by friends; that not only didn't deter me, but never occurred. Instead I've received unexpected compliments, and over the last few years other have seen a higher frequency of hat wearers in Manhattan, Washington D.C., and even when I'm down in Auburn and Atlanta.

Christopher Tucker writes: 

The grandfather of my best friend from college was one of the kindest and most sensible men I have ever met. He was a traveling sales rep for the John B. Stetson company. The man always had the best (the absolute BEST) hats.

GAP Capital comments:

 Born and raised in Chicago, so "hats" remind me of only one person…Dorothy Tillman!!!

Anton Johnson writes: 

"By some accounts, Christopher Michael Langan is the smartest man in America……….he has a fifty-two-inch chest, twenty-two-inch biceps, a cranial circumference of twenty-five and a half inches–a colossal head, more than three standard deviations above the norm"

Esquire article on "The Smartest Man"

Alan Millhone sends another photo:

Here is Tommie Wiswell with his trademark hat tilted back.  Might also been used to keep
overhead light from his eyes while he focused on the many boards.














Russ Herrold writes: 

 I am traveling, and so cannot conveniently post, but I placed orders this week for a new Stetson, a couple of Fedora designs, and some other … I forget …and have in my car, for the conference I am at this weekend, easily 5 or so, which I use both for their protection of my head from the cold, and also so I can 'do some branding' work in the community the conference represents (I also have other 'branding' in my clothing, and appearance), such that people I deal with, who don't know me by sight, can recognize me anyway.

Marion Dreyfus adds: 

I think I am fairly well known as a hat person, and have been since I wore unusual chapeaux /to synagogue and school when 12 or 13.

Aside from style and stating an individualistic aspect, I think a hat harks back to a gentler, more mindful age, perhaps 100 years ago. It also keeps the head, inside of which are all these excellent ideas and scenes for a better tomorrow and a niftier evening today, comfy-cozy. Hats also show, oddly enough, respect. Hatless men in the 1970s were declaring their freedom from the mindfulness of suit and hat, and perhaps we are the poorer for having abandoned hats.

They also keep milliners in funds, and milliners I went to grad school with in the early 90s were aghast at the drop in hat-wearing citizens, alleviated only by temporary crazes or fads that fade as swiftly as they arise.

As a biker, for me, even mild days produce a breeze when one is on that leather seat, and a hat prevents sunstroke and sun in one's eyes as well as too much wind over one's head.

In the Orthodox world, wearing a hat connotes one is married, so it may be foolish of me to wear hats, because i communicate a status I do not currently entertain. But i do like the fashion and focus statement being made by wearing a lid, many of which, actually, i create myself.

Finally, one can maintain a superior air of mystery in a hat, which is impossible to the same degree in a hatless state.

Alan Millhone adds:

What really amazes me on hats are the clods at football games I attend who don't remove their head cover when the National Anthem is played.

Ken Drees muses:

 The baseball cap trend: rappers wearing the caps askew, wearing caps with logos of designers and companies, wearing caps for status/advertising, caps as gang signal, wearing caps in restaurants/indoors, wearing hoodies in lieu of caps, caps as fashion, caps on backwards, caps with brim curved just so, it all has to do with being cool. Lebron James wears Yankee cap to Indians games–it's all about me, fool.

Gary Phillips writes: 

"Wearing a cap backwards is a baseball fan tradition that started with Yankee fans. It wasn't because they liked Yogi Berra, either. The Yankees and Red Sox have a century-old rivalry. A group of young guy Yankee fans, around 1980, took the train up to Boston to catch a couple of games. Boston fans are loud and boo other teams. The young Yankee fans were seated in front of loud Bostonians. The New Yorkers didn't want to start an altercation, but made statement. Those guys turned their Yankee caps around backwards to show the Bostons that they were Yanks fans and proud of it."

Anton Johnson writes: 

On baseball's rally cap superstition:

"A rally cap is a baseball cap worn while inside-out and backwards or in another unconventional manner by players or fans, in order to will a team into a come-from-behind rally late in the game. The rally cap is primarily a baseball superstition."

And hockey's Hat-trick.

Victor Niederhoffer writes:

It would be nice if this worked in the market. But then the adversary could always tell if you were weak or strong, especialy if signals could be reflected from the hat. I was surprised to see that in all the uses for hats I have collected, including flopping the rump of your horse, and fanning a fire, and collecting water from a stream or the rain, I did not see many variants of using it as a signal to get a cab or alert a Native American that a interloper was near, or to collect bets, or to conceal a salt shaker. This latter is particularly effective in the west because to ask a man to remove his hat is akin to a date with boot hill. 

Gary Phillips adds: 

 Surely not a hat, barely a cap, let us not forget the kippah or yarmulke. The Talmud says that the purpose of wearing a kippah is to remind us God is the Higher Authority over us. He alone is Lord of Lords and King of Kings. When we pray and worship with our heads covered, we are saying that we are in total and complete submission to the will of God Almighty now and forever.

I was recently in the hunt for 2 of the crocheted variety for my 2 and 4 year olds to wear to school. My elder son demanded that the kippah be white with a blue Magen David. The synagogue gift shop was unable to fill our order, so I turned to a higher authority - E-bay. As J. Peterman would say, it is 6" in diameter — one size fits all. Handmade in Israel with a *very small* fine stitch. The yarmulkes are from Israel and are made by people who have made Aliyah; low income and handicap people, generating income to make a living.

I grew up and observant Jew until I had my first taste of bacon and blondes, and I never looked back. However, I now find myself lighting the candles, saying the hamotzi, and making Kiddish on Friday nights… Nice.

Jim Sogi writes: 

 A hat is essential in Hawaii to keep off the sun, rain and wind, to keep glare out of your eyes, and at night on the mountain for warmth when it gets cold. There are different hats for different situations. A baseball cap is good all around since it keeps the sun off your face, stores easily, can be worn in a car and is cheap and stays on in a brisk wind. A good brim hat is good to keep the sun and rain off the back and shoulders as well. A nylon hat is light and can be washed. A waterproof rain hat is good for extended rain, and a light nylon brim is good for hot sun. A small brim bucket with a strap is worn in the water while surfing to keep intense sun at bay for hours in the water, and to stay on in the surf. A knit or fleece watch cap is good for boating at night or sleeping in the cold. A helmet is good for sports to protect the skull from boards, rocks, trees and impact. The Original Buff is an adaptable piece that can be worn as a hat, scarf, or facemask. A balaclava is good for winter conditions and can be used as a hat, or face mask in windy conditions. I must have 20 or more hats.

As with all equipment, each type of hat is specialized for specific conditions, and there is not one that is good for all conditions. As with markets, its good to have specialized systems and rules for the differing conditions or cycles and no one rule is good in all conditions but must be tailored to match the expected conditions.

Rudy Hauser writes:

I do not wear a hat indoors with the exception of trains and planes or if there is no good place to put the hat. If there is a draft from air conditioning it helps to keep me from getting a headache. But more important is that unless I just want to hold my hat in my hands there is no good place to put it. I prefer to read, not hold a hat. I once made the mistake of putting a Panama hat in the overhead rack in a plane. The motion of the plane bounced it around enough to ruin it. That gives me little choice but to wear it. If I have a hat without a brim, such as my winter hat, I can a do take it off aside from trains which are not that warm.

Bill Rafter adds: 

 Glare, particularly from lensed overhead lights or high-hat floodlights can cause headaches and eyestrain. That can easily be counteracted by wearing a baseball cap or other large-brimmed hat indoors. I have kept one at my desk for decades.

For years I noticed that whenever I saw a certain actor & director, he was always wearing a hat, even indoors. Then I saw him entering a food emporium at a ski area and he removed his hat. I immediately understood why he always wore one — his particular baldness aged him at least 10 years. So his vanity choice was either a wig or a hat, and he chose the hat.

Hats indoors also provide a level of anonymity for those who do not want to be recognized in an airplane or robbing a bank.

My first "real" hat was a Homburg, which was required for one of my college jobs: pallbearer.



Speaking of commodity spillover, I'd be interested to know the historical effect on near-term stock prices when commodities hit a "high" and then decline.

Many thanks,


Russ Sears writes: 

One data point that may be applicable is Silver Thursday

Mar 27 1980 S&P closed 98.2
next day 100.68
5 trading days 102.25
21 days (April 28) 105.64
June 27 116.00

Looks pretty bullish.

Tim Hesslesweet adds:

Spot energy.

Nymex energy futures.

Kim Zussman writes: 

Using Tim's linked data for Cushing WTI spot crude weekly prices, constructed the attached comparison plot of log (spot crude) and log (sp500). Log (spx) was scaled -1 log unit (divided by 10) in order to readily compare the two.

The chart shows a similar gain for crude and SPX over the interval, 1/87-5/11. Crude remained relatively flat through the 90's while stocks gained. Oil bottomed in 1998, and from this bottom to the peak in 5/08 gained about 10X.

IQ1 marks the 1st Iraq war, with an expected spike in crude price and drop in stocks. Both stocks and oil were near many-year highs in 9/00, and both declined together until a few months after 9/11, when stocks continued to drop but crude rose. At the outset of IQ2, oil spiked and stocks sagged - like the prior Iraq war. From this point SPX rose consistently, and after a few months oil followed.

Stocks hit a many year high in 9/07 before turning down, and crude did the same 8 months later in 5/08. Subsequently oil bottomed faster - in 12/08 - and stocks in 3/09.

For crude and SPX there does not seem to be a clear relation between peaks and valleys, though there was a contemporaneous inverse relationship with two wars in the middle East.



 The main attribute for a successful CEO these days is to be a good beggar. The good beggar has to pretend that without the alms, he would be totally helpless. Also that he previously did very good work.

The big CEO's who clustered around the treasury and were able to beg trillions from the fed and the treasury to ward off bankruptcy in those days were masters at this. The training in beggary was not limited to the US CEO's who brought up the terrible calamity of the Reserve fund breaking the buck (with the potential unrealized loss of 100 million the holders of their 5 billion). But the Europeans were even bigger borrowers than the US banks and companies. The ability to pledge about a trillion of worthless assets to the Fed to get loans when they were on the ropes is something that will have repercussion undreamed of and unintended for many generations. Mainly it reduces incentives, and makes you want to throw in the towel.

The training for CEO's these days should be a course in how to beg. I'm told you have to pretend to be productive, willing to work, and well dressed. Presumably having been previously employed by the alms giver or having a job for him or his family in the future is also helpful (the palindrome always told me that whenever he went to Washington the first thing that the operatives wanted to know was whether their son made a good impression when he applied for a job). A reading of Bertold Brecht and listening to Kurt Weil in the Three Penny Opera would be recommended. A trip to India with a required visit to the museum of Thuggery, to study their methods would also be in order.

Wouldn't this be better than the required courses at the HBS that now displace so much more fruitful learning in how to beg that the most successful CEO's should take.

How could this all be quantified, and what profit making opportunities are suggested by this?

T. Humbert writes:

The above echoes some parallels about how the revenue model of the Church operates. In such, the pastor acts a "collector" of sorts, though his methodology of addressing (read: creating) accounts receivable is a little more subtle than that of the traditional practitioners of that old-world craft.

Rather than the overhand rights and nastily-swung bats of the rough-and-tumble boys, the most effective of the Roman collar guys eloquently whack one senseless if otherwise unscathed with the moral imperative thing to best ensure compliance with donation terms.

And always when others are around so as maximize peer pressure leverage of a most compelling nature.

P.S. I'm on an Amtrak tonight slowly rolling from NY to San Francisco. I don't mind flying at all, but I love trains. How it costs 3x more than a jet ride that could get one there in a tiny fraction of the time I have no idea….Oh, that's right, the government runs the trains…Silly me. 

Tim Hesselsweet writes: 

Different tax rates for different companies/industries and the nature of the provision/loophole that influenced it.

Subsidies for agriculture

Energy subsidies: see this link for 1995 article 

Tax write-offs that support tech

Financial bailouts (overt payments + benefits to front-running fixed income in tarp etc.) + is there a cost of capital advantage to being to big to fail in public markets

I doubt there's much regulation of consumer related business, but there is for financial, energy, defense, health care. Quant measure would be federal agencies overseeing industry, the more oversight the more big cap favored over small cap.

Knowledge of legislation and tax treatment best. Tax rate is one proxy for legislative advantage but that doesn't account for subsidy or other measures that create unequal playing field.



I'm starting to look for systematic ways to play currencies. The most apparent one is the carry trade based on relative interest rates. I'm also going to look at relative real interest rates, relative gdp, income, balance of payments, and money supply.

First pass: literature suggests carry trade is volatility dependent. Looking at PowerShares DB G10 Currency Harvest fund (DBV) which buys the 3 highest yielding currencies in g10 and shorts the 3 weakest, is down 6% since inception on 9/18/06. Indicator: compute 21-day standard deviation of close-close[1] changes and then rank today's reading over the last 90-days.

Buy DBV when the indicator is in the bottom 1/3 of the range and sell when it exits the bottom 1/3 (vol is low)

Total Return 32%
Avg 1.1%
Count 29
Std 3.0%
t 2.0

Sell short when the indicator is in the top 1/3 of the range and buy to cover when it exits the top 1/3 (vol is high)

Total Return 21%
Avg 1.2%
Count 17
Std 6.2%
t 0.8

Seems to work symmetrically although this crude strategy appears better at capturing the positive risk premia of the carry trade.



The average correlation between SPY and its main sector etf's (xle, xlf, xlk, xlp, xly, xli, xlb, xlv) has been very high recently. I wanted to see how volatility tracks with correlation (correlations go to 1 in a panic). I regressed the 60-day volatility of SPY on the average 60-day correlation between SPY and the sector etf's from Sep 2005.

sectorCor = .77 + .04*spyStd
spyStd t-stat 19

Then I updated the regression for 2010 and found
sectorCor = .78 + .10*spyStd
spyStd t-stat 38

Any thoughts on the rising correlations or the relationship to volatility levels?

Vince Fulco comments:

Ex. the most recent vol decline, which we'll see how long it lasts, it is my contention that as spreads have come down, for quite some time, the Street have been manufacturers of vol & opacity in new fangled products and facilitators of fake 'information' for its own sake. What kind of system allows for the trading of 300MM shares of C with a penny spread and the rebate boys still go home big winners? Leveraged and branded ETFs provide more vig for dealers to trade within and sucks in the naive who can't or won't trade the futs space and don't understand the derivatives underlying the products. As we've seen time and again, liquidity which everyone seems to expect and demand esp. when it disappears, would seem to be the defining issue as increasing correlations demolish old theories of portfolio creation. Lack of diversity would seem to badly endanger the system as it does in nature. Perhaps I will be wrong if the tail sellers in this phase overwhelm the vol creators…Or maybe both sides win with enough switches. 

George Zachar agrees:

I agree with what you said about how lack of diversity would seem to badly endanger the system as it does in nature. The investing monoculture gives the illusion of stability and reason, while in fact offering a brittle alogical ecosystem.Street research now is heavily biased toward encouraging carry whoring, which is of course vol selling. 

Gary Rogan comments:

This is also an indication that those who attempt to trade on the fundamentals have exited the building. It's not clear exactly why, but my guess is it's a combination of the lack of trust in any published accounting data related to the out-in-the-open distortions in the financials' balance sheets, the uncertainty about the future and what the fundamentals imply about the future, and the self-reinforcing relative rise in the volumes due to algorithmic trading. When the robots trade based on the algorithms that evolved in the presence of fundamental investors after they are no longer there, sooner or later the results will resemble what would happen to the surface of the earth if gravity were to suddenly disappear. 

Rocky Humbert writes:

Gary: I would be interested in your basis for making this case. One could argue that it was in the late 1990's when those who invest on fundamentals were forced to leave the building. Unlike Elvis, we've now re-entered.

Intel at 11x earnings (now) makes more sense than at 70x earnings. (then). Pfizer at 10x earnings (now) makes more sense than at 55x earning (then). Coke at 14x (now) versus 50x (then) … Internet stocks etc etc …

Gary Rogan responds: 

Rocky, first of all we are talking about slightly different time frames. Certainly the late '90s were a unique period when even the most stubborn fundamentalists had their believes tested I'm talking more of what transpire say between 2003 and 2007, after the "buy on the dips" fully died down and before the full force of the credit crunch was appreciated vs. today. While I don't have a scientific basis for this, what I wrote was based on reading literally hundreds if not thousands of comments on financial blogs, some serious, where the writers expressed disgust at the market reaction to (a) some piece of negative macro news (b) another "stress test" (c) another major bank's quarterly release claiming a great rise in profits immediately deconstructed on that same blog to be (supposedly) completely fake. So many claimed to have given up looking at the fundamentals and expressed so much suspicion, I thought that perhaps there IS something to what they are writing and it's not all a conspiracy to confuse someone. I have also read several articles about the relative rise of machine-generated volume vs. retail investors, as well as the reasons for the market rise in the presence of mutual fund outflows.

I'm not sure that P/E compression by itself signifies trading on the fundamentals. Certainly SOMEBODY does when that happens, like our good friend the sage in the early/mid '70s doing his "oversexed guy in a harem" impersonation. But overall I think it's more indicative of the lack of confidence. I guess what I was referring to is some "typical" market where momentum traders are driving various stock and sectors in all kinds of directions (but not as far as the in the '90s) and some Gabelli-like or Lynch-like character gleefully commenting on the kind of opportunities those idiots gave them in the value space. I'm not sure some space cowboys riding C and BAC like wild mustangs on unbelievable volumes quite gets you there.

Here is more on asset correlations and intraday patterns:

By now, after Zero Hedge has been demonstrating for about a year, even the kitchen sink is aware that cross-asset correlations between stocks, bonds, FX, and commodities is at or near all time highs, which in itself is a very deplorable situation simply because it eliminates virtually all long/short hedging opportunities, courtesy of the Synthetic CDO redux boom whereby most of the trading in stock is conducted via ETFs, as both high beta and low beta, or quality and crap assets all trade as one. But few if anyone was aware of peculiar intraday correlation patterns which may be an eye opener to some readers who believe that stocks are uniformly broken during the day. That is not true: in fact, stocks are only untradeable for the rational investor during the times when the market is most active, around open and close. In fact, in a paper by Michael Bommarito II, "Intraday Correlation Patterns Between the S&P 500 and Sector Indices", we discover that average return correlations have a very distinct U-shape, whereby correlations are near their highs (0.75) just after the open, and before close, while dropping to a statistically significant 0.6 at 1 pm, when volume is the lowest. This merely confirms that increasingly more market participants, read - electronic traders and algos, trade exactly the same strategies at the time when volume is at its peak, indicating that most strategies have nothing to do with actual fundamental investing and all to do with gaming market structure, and hoping to capture some idiot who thinks they can beat the machine. And as we demonstrated recently, many traders no longer trade during the hours between 10am and 3pm. Which means that this is actually a very interesting arb opportunity, for those who wish to take advantage of the machines' downtime, but shorting correlation at open and close, and bidding it up during the day. In fact the trade can be structured as a pair trade with almost no capital downside opportunity.




Looking at the distribution of extrema (20-day min and 20-day max) on a closing basis in the S&P futures by year:

2003 69
2004 67
2005 68
2006 65
2007 63
2008 60
2009 81
2010 96 (annualized)

The process generating S&P prices seems to have shifted somewhat on this metric. What are other ways markets are trading differently? On what metrics are markets trading in line with prior years?

Kim Zussman responds:

A variation on this is count of 20D highs and lows for non-overlapping 200D periods; this time using SPY counting back from 9/14/10. Here are the counts for 20D high, 20D low, H+L, and respective 200D returns:

Date       20D H 20D L H+L    200D ret
09/14/10    49    22    71     0.04
11/25/09    50    14    64     0.35
02/11/09    13    32    45    -0.39
04/28/08    19    24    43    -0.08
07/12/07    57    6    63     0.18
09/22/06    39    12    51     0.06
12/06/05    41    18    59     0.07
02/22/05    39    21    60     0.10
05/06/04    44    10    54     0.14
07/22/03    36    13    49     0.24
10/03/02    12    42    54    -0.28
12/17/01    25    29    54    -0.07
02/27/01    21    24    45    -0.11
05/11/00    27    23    50     0.06
07/28/99    44    4    48     0.37
10/09/98    42    19    61     0.07
12/23/97    41    11    52     0.18
03/11/97    43    10    53     0.22
05/24/96    47    6    53     0.24
08/10/95    61    3    64     0.23
10/25/94    25    17    42     0.00
01/10/94    26    9    35     0.08

The current H+L is the max since 1994.

Correlation between 20DH and 200D return = 0.81
Correlation between 20DL and 200D return =-0.85 (no surprise)
Correlationbetween H+L and 200D return = 0.3



Crew RaceProper preparation: Went to a boat race at St. Andrews recently and saw the senior crew rinsing and washing their boat one hour before game time. They said it adds a small fraction to their time and gives them pride. The importance of getting everything in place and order for your trading day, with every little thing, and every little extra and everything prideful is underlined. John Wooden's first meeting with his players where he teaches them how to wash their hands, and put on their socks, comes to mind.

Playing for keeps: Federer is having the worst start of a season ever, not getting into a final in his last six tournaments. Before he started competing for real, he played a series of exhibition matches with Sampras, and each went three sets into extras. He obviously was fooling around, trying to keep it interesting and this kind of "customer's game" is hard to extinguish — even the memory of it is odious for competition. How many times does a market player put on a reaching trade, for the fun of it, or just take a roll of a dice with a small edge after a series of big wins, and how often does he end up like Federer this year?

Pat EwingHall of Fame: Patrick Ewing was inducted into the Hall of Fame yesterday, and certainly Doc Greenspan would have been a better choice. His grotesque and sullen disposition, his outside game that prevented any rebounds, and the general aura that he created for the team during his last eight years there must have had much carryover effect on why the Knicks are still the world's worst. Sort of like the residue of the bridge player on the take-no-prisoners brokerage house that recently saw a 90% decline in stock price.

Success factors: The Memphis-Kansas game illustrates a myriad of truths about markets. First, the little things that were done wrong made the difference between success and failure. A Memphis player argued with the referee and saw Kansas score an easy basket while he procrastinated. How often does one argue with the floor, or the counterparty and lose much more than he would have by calling it a day? If litigation is involved, know that the legal costs in the typical court case are far greater than your net expectation.

KansasLittle things: The game decided by little things and letting up with Memphis ahead by nine with two minutes to go. It reminds me of days like today where the market was way up as of 1:00 or 2:00 or 3:00 and everything was grand for the bulls, the sun was shining, the water was beautiful (a la Memoirs of a Superfluous Man) and then one minute after the close, the market had dropped 2% from its three month high, a 20 day high, which, incidentally, took the longest to realize of any in the last eight years. One also notes that Chalmers seems to be the best thief in recent memory, and his four steals meant the difference between success and failure. Specialization in one market, one part of the day is often sufficient to give one the victory.

Steve Leslie adds:

I am reminded of the saying "G-d is in the details." This is generally attributed to Gustave Flaubert, who is often quoted as saying, "Le bon D-eu est dans le detail." Others have used this quote, such as Michelangelo and Le Corbusier. Paradoxically it is quoted by the architect Ludwig Mies Van de Rohe as "The Devil is in the details." Interestingly Mies and R. Buckminster Fuller are credited with the saying "Less is More." If one wants to get a healthy dose of attention to detail, watch a pit crew at a Formula One race. It is true poetry in motion. They can fuel a car and change tires in less than eight seconds.

Rodger Bastien comments:

I would agree that the difference in the Memphis-Kansas game was preparedness. The sequence leading up to the three-pointer by Chalmers that sent the game into overtime was badly mishandled by Memphis coach John Calipari and he knew it. You can't afford to overlook anything lest it cost you the game and it was evident that he didn't make it clear to his kids just what to do in that situation (which was clearly to foul to prevent the three-pointer). What's more, an immediate timeout should have been called with two seconds remaining in regulation — again, coach's fault. Reminds me of the poor judgment I too often demonstrate in fast market conditions…

Tim Hesselsweet suggests:

Be aggressive. The passive play of Derrick Rose, who advanced the ball beyond midcourt then promptly passed and ran to stand in the corner, diminished one crucial source of leverage for Memphis. Rose destroyed Texas's 1st-team All-America PG Augustin in the regional final and took advantage of UCLA's guards by penetrating to either score or draw additional defenders and find open teammates for easy baskets.

Alan Millhone notes:

Sean KempSaw on the news a current NBA player has 10 children by eight women and has not paid his support payments to any of them. Not a good example for any young athlete who aspires to greatness in basketball or anything else ! This player might get into the "Hall of Shame."

Nigel Davies assays:

There are two different forms of preparation here; technical preparation and psychological preparation via ritual. Washing the boat is technical whereas John Wooden's hand/sock washing would have been mainly ritual, which is not to underestimate its importance. Rituals provide valuable triggers to enter a particular state of mind.

At the chessboard both are used. For example one might study an opponent's games and/or prepare a particular variation (technical) before going to the board at a prescribed time (e.g. five or 10 minutes before the start), carefully filling out the score sheet, cleaning one's glasses or some such (all mainly ritual).

Good preparation includes proper consideration of both of these. And one of the main strengths of experienced players is that they often have their preparation routine well worked out.

J.P. Highland offers:

JuventusEuropean soccer is played in a way that guarantees the cream always comes on top at the end of the season. The winner is the team that obtains more points after a long 38 game season. The only problem with this system is that it leaves almost no chance for surprises. Real Madrid and Barcelona have won most championships in Spain, so have Juventus and Milan in Italy and Manchester United and Liverpool in England.

American sports are more socialistic, impose salary caps, revenue sharing, give a chance to bad teams to draft before winners and have a playoff system that gives a higher probability of having a winner th product of randomness by inviting underdog teams that are graciously called wild cards that can later become champions like the New York Giants.

Speculation is closer to the European system. You can get lucky some days and reap a good reward but in the long run the lack of sound money management and a strict trading plan will put you out of business.

Clive Burlin recounts:

I took an introductory flying lesson recently. I was shocked at how much checking gets done before you roll down the runway. While the instructor was going around the plane checking the propeller, flaps, gas, tail, etc., I was thinking to myself "you know, if you did half the amount of prep before putting on a trade, maybe your results would be a bit better." This thought was totally reinforced once inside the cockpit where the pilot sat with this long check-list seemingly checking every button and switch there was. A few more checks before take-off and we were barrelling down the runway.

Scott Brooks recalls:

Some years ago, I was listening to an interview of several NBA players and the focus was on Patrick Ewing. One thing all the players agreed on was that Ewing was cheap. He never picked up any tabs. Don't know if it's true or not, but I found it interesting that the biggest personal matter that they all agreed on, and spent a inordinate amount of time talking about, was his "cheapness."



 On May 16th, Terrance Odean and Steve Ross debated behavioral versus neoclassical finance at the New York Academy of Sciences.

Both agreed that markets are largely efficient. Ross described the "migration of anomalies" where "sharks" capitalize on and thus mitigate inefficiencies. But procedurally, Odean echoes Larry Harris in asking "who is on the other side of your alpha" and focuses on the psychological mistakes individual investors make (overtrading, selling winners/holding losers etc.). As an economist, Ross has difficulty ascribing pricing to one particular psychological malady or another and instead urges investors to follow the money and discern the incentive structure. Rick Bookstaber, who moderated the discussion, was optimistic that a biological model that incorporated feedback might provide additional explanatory power. In all, it was an interesting discussion about the nature of the elusive edge.

I strive to document the rationale for including explanatory variables and while some studies incorporate a behavioral (recency), economic (cobweb) or domain (market structure or environment) framework, most of my studies rely on theory-less statistical modeling which the private equity crowd refers to as "correlations". Is there a theory to explain why data driven investing might succeed?



If April closes higher than December's close,
in SP points:

to May close-
Avg 1.8
Count 8
Std 38
t .1
%Pos 63

to June close-
Avg 19.4
Count 8
Std 39.8
t 1.4
%Pos 75

to October close-
Avg 44.6
Count 8
Std 59.4
t 2.1
%Pos 88

to December close-
Avg 96
Count 8
Std 53.7
t 5.1
%Pos 100



Going back to 1960, S&P 500 returns on a yearly basis:

Avg. 8.2%
Std 15.8%
Count 47
t 3.5
%Pos 72%

There have been two instances of exactly 4 consecutive positive years, in the following year:

Avg. 17.1%
Std 3.5%
Count 2
t 7
%Pos 100%

And 7 instances of 4 or more consecutive positive years, in the following year:

Avg. 8.4%
Std 13.8%
Count 7
t .9
%Pos 71%

After all positive years:

Avg. 7.5%
Std 13.4%
Count 34
t 3.3
%Pos 71%

After all negative years:

Avg. 10.0%
Std 21.1%
Count 13
t 1.7
%Pos 77%

I looked at multifarious combinations of runs and binned returns, but the only thing that the study suggests is that returns in the years following positive performances tend to have lower variance.

f-test on difference in variance: p-value = 0.04


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