ETF Prophet

Most asset return processes can be characterized as containing a primary trend, along with mean-reversion around that trend, as well as a certain amount of random noise.  Econometricians classify these elements using a Hurst Exponent as either : 1)black noise (trending/positive autocorrelations- Hurst>.5) 2) pink noise (mean-reverting/negative autocorrelations- Hurst<.5) or 3)  white noise ( no trend/mean-reversion, low/insignificant autocorrelations- Hurst=.5). [...]

The central concept of the “All-Weather” portfolio is balance: having an allocation that will perform equally well across different economic regimes.  The original portfolio balances portfolio risk and performance with broad asset classes to be neutral to changes in  economic growth and inflation.This basic concept can be extended to create an “All-Weather” equity sector portfolio. [...]

I am periodically asked to update the performance of the two S&P 500-based models that are published at each close in the ETF Rewind Pro newsletter.  Here are the original posts from over two years ago discussing the construction of these signals: Mrkt_MACD – Seeking Linearity (Chart 1) Mrkt_RSI – Relative Volatility & Mean Reversion I have updated the runs, [...]

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 [...]

One of the concepts that I have developed with Michael Kapler at Systematic Investor : http://systematicinvestor.wordpress.com/ is a  method of passive portfolio allocation (omitting expected or historical returns) that captures the true spirit of diversification. It is a more elegant but also more complex than our heuristic algorithm: Minimum Correlation. This new method is called “Cluster Risk [...]

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…

In today’s environment more than ever, risk attribution is becoming critical to understanding portfolio composition. It is more important to understand how much risk we are effectively betting on a given position as it is to create a prediction for the return of that position. Incorrect position sizes (look up the London Whale) can turn [...]

This post is about how I define how much money is assigned to each trade also known as money management. More sophisticated traders define money management about how much risk you want to take for given trade. I want to extend that to how one can reduce risk and improve returns of it’s overall portfolio by using advanced [...]

Jack Welch is one of the most recognizable names in business as the former CEO of General Electric. His skills and leadership in running one of the largest companies in the world have been the source of numerous books and case studies in the business literature. Running such a large corporation like GE that makes [...]

A desirable goal of relative strength investing or any type of portfolio algorithm would be to track the best stock/asset from a group of stocks/assets in hindsight. In other words, we wish to use an approach that can “follow the leader.” This goal is a close relative of universal portfolio algorithms (see Universal Portfolios http://www.stanford.edu/~cover/portfolio-theory.html  that [...]

. . . . . . . . . .. .. . . . . . . . . . . Last Week Last weeks NEW trades slightly stretched available cash. As already stated in earlier posts I’m going to reduce the number of shares for LAST position within NEW trades sections: BUY ERTS 645 instead [...]

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I will preface this post by saying that this is a concept that I have not yet had a chance to test out. That said, I usually start first with a theory or a logical observation and proceed to creating a quantitative method to capture that insight. The concept relates to everyone’s favorite topic–relative strength [...]

While the market continues to log extended directional runs in a relatively high volatility environment, you may have noticed the recent dramatic reduction in average daily range. The charts below track the cumulative absolute change in daily S&P 500/SPY price over the course of the last trading year. While granting the major ‘reset’ in valuation [...]

I found a recent post by Woodshedder on the behaviour of markets after 200 day highs and 200 day low absolutely fascinating. Well worth a read. I was interested in this conclusion: "The market making new 200 day highs is…

For me, the recent market shakeup has highlighted the growing pension apartheid in this country. There is a clear division between… 1) The pension haves (final salary pensions usually public sector) and 2) The have nots (everyone else on defined…

As European politicans cut short their grande vancances to attend to the latest crisis, it’s worth having another look how the Halloween effect is once again playing out. The theory is that markets perform best between November and May and…