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 All-Weather Portfolio was designed by Ray Dalio (and clearly influenced by Harry Browne of the Permanent Portfolio) as a robust static allocation that can be used by investors to deliver consistent performance over time. The logic of the portfolio construction is to be neutral to risk/uncertainty with respect to inflation or economic growth–the two primary [...]

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, [...]

A natural comparison for an allocation method that makes use of dynamic clustering is to use a static clustering method. An example of the use of static clustering are the sector classifications made by large index firms. Typically clusters are formed based on the type of business or industry associated with a company (ie utilities, energy [...]

In the paper we wrote on The Minimum Correlation Algorithm we introduced the Composite Diversification Score (CDI). The purpose of this measure was to demonstrate how well a set of portfolio weights has minimized the average portfolio correlations and also balanced the risk contributions from each asset as  measured using the Gini coefficient of inequality. 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 [...]

Just a quick look at what’s going on over on the Mosaic SITUATIONS.  We track the major sectors ETFs  of the market each day and rank their relative strength and momentum to derive short term trading opportunities while simultaneously building an equity curve of the top 2 or top 3 daily ranked ETFs. The colorized [...]

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 [...]

After months of researching and coding and much help from Jeff Pietsch, I have finally completed the basic Walk Forward Test!

As an interim to getting the long overdue institutional version of ETF Rewind up and running, here is an overview of where my ETF Risk models are at. These were mentioned several weeks ago when early warning signs were still gathering like storm clouds.

Two weeks ago my first “Sensitive Issues Scoring” model based on relative positioning of and among nine economically sensitive ETFs issued a first warning for equities. Last week, a fuller, more robust version driven by fifteen intermarket sector, style and country ETFs weighted for importance joined the party with its own warning signal as trading [...]

Last fall I spoke at an active money management conference, where I introduced about a half-a-dozen or more weekly inter-market ETF models designed to measure “risk acceptance” in equities. The subject of this post features one of the more basic models, which was partially inspired by the highly recommended “The Lawyer Trader” blog.

I’ve been working on bigger projects till about a week ago then I got real curious about a trading idea: what happens to S&P 500 next week when commodity currencies are aligned up or down the same day? What happens if I want to reduce the drawdown periods and increase the run-up periods? what happens [...]

In the last post we introduced the Gini Coefficient as a measure of inequality and statistical dispersion. The primary benefit to using the Gini versus standard deviation is the proper consideration of abnormally large values in the cumulative distribution. There are many applications of the Gini within quantitative finance. One example is the Mean-Gini framework, [...]

“Trapped Between the Living and the Dead Again,” the film poster tagline reads. By one measure, the retrace from 252-day highs, this bear market  has been mild in nature, politely reversing on a dime October 4 at the official -20% mark, currently registering a mild -7% (12/13/11). For all the dramatic daily swings, even the VIX [...]

Update Last week the portfolio saw a decrease in equity (-1.23%). For the coming week no change in positions. However capital will be moved from GLD into ERTS. Next weeks portfolio profile: Gold  17% Treasuries   17% Stocks   66% Cash  0% About Portfolio Trader Read more about Portfolio Trader here (link). Past trades can [...]

Traders seek to find the next BIG think ala Apple, Bidu and co. Often times this desire is founded by the underlying assumption that taking higher risk is rewarded with higher returns. Furthermore many traders believe in an efficient market where as one can outperform the market only by taking above average risk. However this hasn’t been [...]