ETF Prophet

Early in the week the May 1600 call buyers tipped off a potential run to test the top.  The Boston tragedy was quickly forgotten and it provided another buying opportunity as the market tested the 50 day moving average.  We would probably be at new highs if the bombing did not take place.  Seasonally the next [...]

Recent price behavior illustrates how traders should not equate volatility and absolute mean reversion. Over two weeks of choppy up and down has represented next-day reversion perfectly, sending our chop versus trend indicator to extremes. However, ranked volatility (percent ranked HV-100) is likewise at annual lows. Indeed, the last two years have contrastingly provided several [...]

Despite a lousy jobs number, Korea nuclear threat, China bird flu, and IWM testing the 50 day moving average, the S&P was able to close only twenty points from all time high. On the one hand we have very overbought TLT and there are signs today bond could reverse.

Here is a  cluster representation  of some of the major markets that are traded internationally. The groupings were formed using data over the past year with a  clustering algorithm that is proprietary (correlation is used as a distance metric). What is interesting is that this particular cluster grouping has persisted  without much change over the [...]

The following graphic is borrowed from a static risk parity approach via Salient Capital Advisors: http://www.theriskparityindex.com/static/pdfs/Salient-Risk-Parity-Index-White-Paper.pdf.  The visual is useful for readers to understand the nuances and relative merits of a Cluster Risk Parity (CRP) approach. In their approach the individual assets and clusters are defined in advance, and thus there is no dynamic clustering method used. However, the [...]

Today’s news centers on the VIX rising above 20 for the first time since July 23.  This is a weekly chart with a few of my favorite technical indicators.  For active traders the 2 SMA8 lines on the chart are of the high and the low…creating a support resistance channel that is amazingly reliable fro [...]

The chart below demonstrates how Ranked Historic Volatility (volatility compared to past levels) has continued to fall even as price finds itself at two-week lows. Hardly a panic sell even as the change in intermediate trend has become increasingly clear, as first broadcast by large-cap technology…

“The Final Problem” http://en.wikipedia.org/wiki/The_Final_Problem is a Sherlock Holmes story that contains interesting references to modern game theory. Holmes- the legendary detective- is on a mission to foil an equally intelligent adversary- Moriarty. Holmes is forced to choose beyond conventional decisions to account for the fact that Moriarty is likely to deduce his response based upon [...]

The dusk is setting in on the world of factors and economic theory. If my views seem dramatic or extreme, consider that the markets did not make sense from a CAPM world view during the best (and simplest) of times. Today, the world markets are a strange and dangerous place. We are in the midst [...]

The recent performance of the Permanent Portfolio seems to have stoked some interest in the strategy crafted by Harry Browne. I’ve been noticing more references to the strategy making their way into my daily reading of favorite blogs. Looks like there is even a new book coming out about it, the authors of which have an informative blog I just discovered. I haven’t given the strategy much thought for quite some time so I read Harry’s book Fail-Safe Investing as a refresher. Only a small portion of the book deals with the composition of the Permanent Portfolio, but it is worth the read if you are not familiar with Harry’s 17 Simple Rules of Financial Safety. The Permanent Portfolio has three requirements: Safety, Stability, and Simplicity. The allocation is: 25% Stocks, 25% Bonds, 25% Gold, and 25% Cash. Positions are rebalanced on an annual basis when any one of the position’s allocation breaks the range of 15% to 35% of the portfolio. That’s it. The idea is to be able to profit in any of the four major market environments identified by Harry: Prosperity, Inflation, Tight Money or Recession, and Deflation. So how has this strategy performed? Quite Well: 1990-2012 [...]

Not only has this site been mostly dormant for over a year, but so too has been my trading activity. I have been extremely busy over the past few years with a wide variety of endeavors which have occupied most of my waking hours. In the process I have been lucky to work with some amazing people who are way smarter than me. It has been a challenge, and in order to keep up I’ve had to focus on the details, like trying to figure out how to structure and code some pretty complex algorithms, while not concerning myself too much with the big picture. This experience, while still ongoing, has left me with a long list of yet to be articulated questions piling up in my mind. In order to start the process of working through these questions and searching for answers I decided to spend some time updating this site to share some of my thoughts and ideas as a prepare to relaunch my trading activity. Why even trade in the first place?        What lures me to the market is that it is one of the last frontiers on which merit rules and using economic means only (as opposed to [...]

Week nineteen’s downtrend relentlessly carried forward this past week on heavy volume. It’s evident that de-risking/ re-pricing is underway, and long-term moving averages are being challenged. Indeed, the S&P 500 (SPY) fell a full -4.3%, breaking its 100- and 200-day EMA’s. Of course the SPY was eclipsed by another two points by the higher beta [...]

ETF Rewind Pro – 05.15.12 Dear Subscriber, Equities logged another day of distribution, this time on quite heavy volume and our reversion bias weakened further still, which is unusual during a normal pullback — it’s that abnormal factor that’s weighing it down.  And yet, we’ve yet to see what I’ll call ‘healthy’ capitulation.  With key [...]

The environment for trading contains numerous sources of potential risk, from sovereign defaults to bank failure to war in the Middle East. The ability to follow broad and protracted trends across global markets and commodities has never been more difficult. This explains the recent popularity of volatility index trading and also asset allocation methods that [...]

Talk about a reversal of fortune — last week we identified early overbought conditions, only to finish the first week of May broadly oversold on strong downward reversion momentum. In fact, the S&P 500 (SPY) was lower for the week by -2.4%, leaving price just a dollar or so above monthly support. In that last [...]