ETF Prophet

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Dave Evans

Well there was no bounce on Friday, but a few things seemed a little odd to me. Not that the markets 'should' have bounced, indeed the trendline break and the potentially game changing news announcement were a red warning lights in retrospect.(S&P futs up 0.5% Monday as I write this though)

However, there's something else that doesn't smell right to me. Firstly, as you can see on the chart below, in recent times, the Aussie and New Zealand dollar have been a good proxy for risk taking. These two currencies have the highest interest rates in the Western world and are the weapon of choice for carry traders.

 25-01-2010 06-26-51

Correlations/ relationships like this wax and wane but I did find it odd that the risk proxy currencies finished the day unchanged with a muted reaction across other currencies as well. 10 year notes also showed a muted reaction relative to that of the Dow & S&P 500. It could imply that the move on Friday was not a general flight from risk that the VIX jump implied (imperfect as this is), but a concentrated slump in equities and in the financial sector in particular.

It's a small sample set (A slump in oil prices argues against this for example) so these are just musings, which lead me to one conspiratorial thought. In Barry Rithholz book on credit crisis he writes about the mythical plunge protection team which some have speculated may have links with Goldman Sachs. To take this on the fly conspiracy theory to its extreme, could certain players have thrown the metaphorical rattle out of the pram on Friday in order to influence the final outcome of the still to be solidified Volcker plans?

Speaking of the unquantifiable, Friday's plunge did make me think about pure quant trading vs adding discretionary layers. Had I been actively trading on that day, I would have been wary of buying the dip on Friday because of the trendline break and unknown impact of the Obama/ Volcker plan. This is of course in retrospect as I was entirely out of the market so unencumbered by thoughts of a position or potential position, but it does raise some interesting thoughts.

In the original Market Wizards book by Jack Schwager, few of the traders interviewed were pure quants. This may be due to the lack of readily available computing power back then, but it made me think. Does the human brain's ability to adapt and sense what it cannot articulate mean that discretionary trading or adding some discretionary layer to quant trades will always have an edge over pure quant? Or does quant trading allow us to override our worst instincts and buy into dips like Friday? The human input is therefore the discretion in knowing when to drop a quant strategy and the research and hunches that go into its creation.

There does seem to be an emerging new wave of quants, at least in the blogosphere. Is it time for a 'Quant wizards'?

By Quant here I'm not referring to dark pool HFT type stuff. 

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