Farewell

Hi there,
There has been almost no reaction to our posts and comments so we understand that there is no interest... and that is fair. It is worrisome the huge amount of noise spread through the web and media, and it is also worrisome that no tools are made public to deal with it when it comes to investments and finance. Whether you like them or not, we find these sort of tools amazing and helpful for decision making. Develoment is sometimes tiring and convoluted but it is worth the effort. Communicating is also tiring but not worth the effort. Maybe in the future we will decide to set up firm to profit form them, but that is a little bit to far to say now. Maybe, if they werent free, people would think they are worth something. What a mistake!! I have seen a ton of worthless financial trading services offered in the www. Anyway, good luck in your trading.

#5 Edition: SP500 Quant Market Report, May 7th 2012

The SP500 ended downbeat mainly because data pointed that growth is softening. So the market is in the process of deciding whether or not the current positive economic setup is sustainable or not. Also keep in mind that 1Q results in the US are almost over and that politics play a strong role both in the US and Europe (expect lots of noise from Greece, and maybe less so from France). So, while the market jitters from economic noise, and decides whether or not a change in growth trend is turning up, it is likely that it manages to regain the top. As usually it will do so only for the pleasure of misleading us to later kick our ass with no mercy (in our opinion a 'growth accident' will likely take place at around 3Q12).
 

Long ExtremeStop @  1347.2: comes down but suggesting less 'appetite' (tolerance) to endure downward moves in prices in case we decide to go long.  Past week long ExtremeStop was triggered the very last day leaving us out of our position. 

Short ExtremeStop @ 1400.5: moves up pointing more 'appetite' for being short.



DPTA We completely misunderstood (by misreading) DTPA last week and got punished accordingly (stopped out at a loss). Yes, there is more and more blue coming, but this is only a sign for the next few weeks in the future (look into the superimposed red square in the chart ; refer to note 1 below). Also note that past data changed a bit in the chart. This happens because it is a rolling window 100% recomputed every time, in which a small revision of past data generates a risk profile that wasn't available at that time. Doesn't matter, we always look into the red square and make our decision based on that. So let's try to do it better this time. The SP500 was strongly attracted to the 1370 area breaching our long stop. Getting lower to the 1350 area is more likely than we would desire, but if it just manages to remain around those levels, it will confirm the support that has been forming from the beginning of April. Summing up, some ripples are left and they may clear up in one or maybe two weeks. Once past, the SP500 will try to reach the previous top with a sharp move.

Conclusion:  

1) volatility on the rise,  2) lower bound formed likely to be tested back, 3) seems the the week will start on a weak note, as usual its a close call 
We tried to get in the market and were kicked out without ceremony (deservedly of course). We believe that an opportunity is on the make to get long but will try to be more patient to take advantage of it. We find it amusing that our repeated mistakes and wrong decisions help demostrate that these tools are adequate. In our case we will remain playing the game though slowly but consistenly losing capital :-( 


WE ARE CURRENTLY PONDERING WHETHER OR NOT THE WRITE UP OF OUR REPORT IS WORTH THE EFFORT. IF YOU FIND THESE COMMENTS USEFUL, WE WOULD BE GRATEFUL IF YOU DO SOME OR ALL OF THE FOLLOWING:

-INCLUDE THIS BLOG IN YOUR BLOGROLL
-INSERT A CONSTRUCTIVE COMMENT 
-PROPAGATE THE REPORT THROUGH THE WEB


IF YOU DONT LIKE IT YOUR ARE ALSO WELCOME TO EXPRESS IT, BUT REMEMBER TO EXPLAIN WHY, PLEASE

Note 1: Reminder on how to interpret DTPA. The chart provides the probability of a strong movement around the trend for the next few weeks. As you can see it always adds up to 100%. The colours represent how much danger we should expect: light and dark blue are good for those who think they should stay long. Orange and red have the opposite meaning. In between, representing low chances of change in the trend in force (whether upwards or downwards) we have green.
Note 2: we will cover more explanations about DTPA (Dynamic Technical Probability Assessment) and ExtremeStops in our Bits for Thought section 
Note 3: Always keep in mind our disclaimer issued in our first post (31/03/2012)

#4 Edition Annex: SP500 Quant Market Report, May 2nd 2012

After almost screwing up we get long at 1398 with stop at 1372.8.  Not much to earn though. Regards.

#4 Edition: SP500 Quant Market Report, April 30th 2012

The SP500 improved gradually through the week in the midst of mixed data and turmoil coming from Europe. US 1Q12 GDP disappointed a bit, but to our purpose, it has a positive reading (also recall that in 1 month we will have a revision) when looking into the medium term. Results progress is adequate with positive comments coming from firms management teams. It is unlikely that this fundamental setup translates into a downward trend market in the near future. It is more likely at this point that the SP500 regains back the levels attained at the beginning of April. It is also likely it breaks through the resistance at the top, although maybe, not for a long time, but we will comment on that when the time comes due.

Long ExtremeStop @  1372.8: goes up but remains distant from past week close. It again suggests increased 'appetite' to endure downward moves in prices in case we decide to go long. Notice the minimum of the week right below the previous long ExtremeStop.

Short ExtremeStop @ 1416.0: moves up by a small amount, remaining close to last week's stop. 'Appetite' for being short diminishes. The short ExtremeStop was triggered the very last day. Although it could be an ill defined stop there is a chance it was touched for a good reason (we will know soon).

The slight narrowing between stops is good news as it points out that ExtremeStops requires less volatility to make a clearcut decision.


DPTA reading changes dramatically (look into the superimposed red square in the chart ; refer to note 1 below). Dark blue appears very strong in the next few weeks with no light blue in the interim. The final interpretation is not simple though. The current narrow sideways market is almost finished but not completely done. Some small ripples are left, but that could happen this very same week. Once past, the SP500 will reach the top formed at the beginning of April with a sharp swift move. According to our models it is likely that the week starts on a weak note with a pullback that attracts the SP500 to the 1375 area. While we don't think it will be breached, it will confirm that the short term support is finally consolidated.

Conclusion:  

1) volatility to abate,  2) lower bound formed already, a test likely at the beginning of the week, 3) the week to start on a weak note, but not obvious this time, its a close call and  4) downside risk limited
We have been out of this market since we considered it untradable from the point of view of our models. Although the top of the market is pretty close we think it is the time to take a position. We believe that an opportunity is on the make to get long, and that it will materialize during day 1 or day 2 this week. We will issue a quick note the moment we get long (the stop for that long position will be, of course, 1372.8). For those willing to take some risk right now it is advisable to do it with half of the total position (this is the creative use of ExtremeStops, but since we have not tackled it in our Bits for Thought section we won't delve into the logic yet). Hopefully we will have a chance to show that DTPA and ExtremeStops are apt tools to navigate the market, even if we consistently make wrong decisions.


WE ARE CURRENTLY PONDERING WHETHER OR NOT THE WRITE UP OF OUR REPORT IS WORTH THE EFFORT. IF YOU FIND THESE COMMENTS USEFUL, WE WOULD BE GRATEFUL IF YOU DO SOME OR ALL OF THE FOLLOWING:

-INCLUDE THIS BLOG IN YOUR BLOGROLL
-INSERT A CONSTRUCTIVE COMMENT 
-PROPAGATE THE REPORT THROUGH THE WEB


IF YOU DONT LIKE IT YOUR ARE ALSO WELCOME TO EXPRESS IT, BUT REMEMBER TO EXPLAIN WHY, PLEASE

Note 1: Reminder on how to interpret DTPA. The chart provides the probability of a strong movement around the trend for the next few weeks. As you can see it always adds up to 100%. The colours represent how much danger we should expect: light and dark blue are good for those who think they should stay long. Orange and red have the opposite meaning. In between, representing low chances of change in the trend in force (whether upwards or downwards) we have green.
Note 2: we will cover more explanations about DTPA (Dynamic Technical Probability Assessment) and ExtremeStops in our Bits for Thought section 
Note 3: Always keep in mind our disclaimer issued in our first post (31/03/2012)

Bits for Thought #2: Stops for the Long Run?

All of us have read all sorts of comments about stops and their applicability for the short/long run. Too much noise, no clarity at all. But there is a reason for this. Remember what we said before? This problem has an infinite number of solutions, so there is room for all opinions, and also for a great deal of statistically acceptable efficient stops. There are many combinations of slightly different stops time series with similar 'good enough' statistical properties, just choose the one that suits you. We will make our contribution to the short term/long term dilemma knowing that, almost for sure, our view will be just another drop in the already messy and infinite sea of opinions.

Stops for the Short Run

This is the easy one. Consistent stops should be developed considering from the very beginning that they apply to a very specific (and short, of course!!) time frame, after which they die replaced by new stops (it's kind of a walk forward procedure). Without fulfilling this premise, stops are just an almost worthless number void of any statistical properties that might render our investment process inefficient. When we think about the short run the reasoning is simple, on breaking the stop level we want us out of the position to avoid losses that, with a high degree of certainty, might take place in the next few bars. 

We opted to calculate ExtremeStops in a weekly basis because the idea was to help the short term trader to minimize losses in the daily basis without any consideration about the long run. It follows that: 1) those stops won't be very far from the last close (asymmetric; on average 2 to 3 percent points above/below the last available close), 2) they apply approximately to the next 5 trading days and 3) short term re-entry strategies should be considered carefully. This is the case of the high frequency trader and the reason for ExtremeStops to exist (we later found some unexpected side effects that we will tackle in a future BFT release).

Stops for the Long Run

Now, lets think big, lets set the problem for the long run (12 months). Here comes the mess we want to disentangle. For the sake of simplicity we will assume the case of someone that is long the market. If you are investing long term there is no point in betting downwards for a sustained period of time. Your bet will, on average, be that the market continues its march up.

Mess 1: Investor Z makes decisions with a 12 month time frame in mind. He thinks that if he invests for the long term he should accept more losses before he exits his position. In mess 1, the size of the maximum accepted loss is implicitly proportional to the time horizon of the investment (the longer the investment term the higher the loss he should be willing to accept before exiting a trade). WRONG!

How much would this individual be willing to lose before he exits his position? Since the longer the term, the higher the loss he will accept before exiting, what's the right figure? A 5% loss?, 10%? The longer the time of our planned investment the wider the stop is sort of an insane philosophy. There's no need to scale the size of the stop loss with time because that way we are increasing the chances of materializing a big loss just when the pain is about to end.

Mess 2: Investor Z wants stop losses that 'save him' from 10% to 20% crashes (those that last for several weeks; remember july'11) but never be forced to exit unnecessarily from a nice long and correct long term position. Z doesn't want any of those obnoxious stupid useless stops, unless all these 'very reasonable' conditions are satisfied. WRONG AGAIN!

OK so Z wants perfect stops. Those wide enough during the uptrend so that intermediate small corrections don't exit him, but very tight the moment a serious (and lasting) crash is about to happen. Doesn't this sound stupid? In the first place we need to have in place a convincing tool that deals with long term re-entry points efficiently, just in case we are stopped out in an intermediate correction. In this case, please, use common sense and a moving average to signal when to exit and don't burn your brain searching for the perfect stop. A moving average (50 days, maybe 100) coupled with some sort of fundamental tool (for conviction and re-entry signals) will do a fine job. This combination will help to avoid some of the mistakes the average will surely make.

Conclusion

A few thoughts:

1. Decide first what type of investor YOU are, high frequency-short term or low frequency-long term
2. Remember that scaling your stop with time does not necessarily make it more efficient. The  relationship between the size of the stop loss and time is a little more subtle and convoluted. The stop loss should ALWAYS be linked to the probability of more and unacceptable losses materializing in a specified future period of time.  
3. If you are a long term investor then don't ask for miracles when using short term stops (and don't complain about short term stop losses!!, of course they are going to exit you more frequently than you would desire). Use instead a moving average to generate exit signals and some kind of long term fundamental tool to provide some meat to the decision making process. It is not the percent you decide to lose what makes the stop long term or short term. It is the nature of the underlying tool that generates the stop what makes it. If you are a very long term investor, search in the web for the Mebane T. Faber paper about the 10 month moving averages study.
4. If you are a short term investor use a device suited for that purpose. The idea is to preserve capital and be able to shoot again if you made a mistake in your last trade. Be ready to compensate the stops system errors with a conviction/re-entry tool. ExtremeStops/DTPA is an alternative, though not 100% flawless. Try yourself, you may come up with better tools.

#3 Edition: SP500 Quant Market Report, 23rd April 2012

The SP500 experienced a very jittery behaviour the past week. Given the lack of clarity  we decided to stay out and reconsider our position this week. It still holds that medium term fundamentals are still moderately supportive (US 1Q12 GDP figure to be released this Friday; everything ok in the US 1Q results campaign with better comments coming from management teams). This makes it unlikely that this movement morphs into a steep downward trend. We think that a sideways market (not fully consolidated yet) will prevail until investors find clearer clues about whether these fundamentals are here to stay or not. There is a tug of war between fundamentals, decisions/forecasts coming from supranational institutions (IMF), central banks (less dovishness in developed markets), political events (France and Dutch politics) and peripheral issues (Spain and Portugal; watch the Ibex for the opportunity to lock into high dividend yields) 

Long ExtremeStop @  1349.8: comes down significantly from past week's stop but not due to price action. It points towards an increased 'appetite' to endure downward moves in prices in case we decide to go long. Those moves won't be considered abnormal and it therefore follows we won´t be stopped out immediately.

Short ExtremeStop @ 1403.3: very close to last week's stop. We detect a little less 'appetite' for being short.

The widening between stops is nontheless uncomfortable because it points that we should deal with more uncertainty before we know what sort of waters are we navigating. In  this case ExtremeStops signals that if more volatility materializes it won't be easy to decide to which side to tilt.


DPTA comes  again with no clear cut reading (see superimposed red square in the chart below; read note 1 below). It is apparently less mixed than before but still suggesting that a sideways market is on the make with some traces of downside risk. The support might not be completely formed. Although it is a close call, it could happen that the lower bound of the range consolidates below past week's Long ExtremeStop (1362.5) and above the current week ExtremeStop (1349.8).

Conclusion:  

1) keep expecting the volatility typical of a range-bound market,  2) we don't have a lower bound formed yet, 3) expect a weak start this week, with improvements as it progresses 4) seems that downside risk is progressively abating
We were out this untradable market at the beginning of last week. According to our models it is not advisable to make a strong bet yet, so we remain neutral for now. It is worrisome that no blue signals appear in DTPA, meaning there is little room to bet for a recovery up to the top for the moment.


Note 1: Reminder on how to interpret DTPA. The chart provides the probability of a strong movement around the trend for the next few weeks. As you can see it always adds up to 100%. The colours represent how much danger we should expect: light and dark blue are good for those who think they should stay long. Orange and red have the opposite meaning. In between, representing low chances of change in the trend in force (whether upwards or downwards) we have green.
Note 2: we will cover more explanations about DTPA (Dynamic Technical Probability Assessment) and ExtremeStops in our Bits for Thought section 
Note 3: Always keep in mind our disclaimer issued in our first post (31/03/2012)