Quant Macro Investing

Risk Taking Disciplined

Aggregate Buyback Activity a Useful Stock Market Indicator?

September 16, 2009 – Aggregate Buyback Activity a Useful Stock Market Indicator?

A reader noted and asked: “Today’s issue of USA Today has a story about a big drop off in company stock buybacks. Any idea what that has predicted in the past, if anything?”

See “The Stock Supply Cycle”: “Results appear to indicate that firm executives are not especially good timers of the aggregate stock market.”

There are other studies profiled at “Blog Synthesis: Buybacks and Secondaries”, but they are mostly company-by-company rather than aggregate stock market studies. The company-by-company studies generally (not universally) indicate that corporate managers probably have some ability to time their own stocks.

A principal advocate of aggregate issuance/buyback activity (net change in equity trading float) as a broad stock market indicator is TrimTabs Investment Research/Charles Biderman (see “Charles Biderman, Going with the Flow”). Buybacks represent a part of the change in float.

September 17, 2009 Posted by | Indicator setup | 1 Comment

S&P 500 More Than 20% Above Its 200-DMA; First Time Since 5/83

S&P 500 More Than 20% Above Its 200-DMA; First Time Since 5/83

ln what has been an almost unprecedented move, the S&P 500 closed more than 20% above its 200-day moving average today for the first time since May 1983.  This comes just six months after the index traded the furthest below its 200-day since the Great Depression!  Not even during the great bull run of the 90s did the index get this far above its 200-DMA.  This has happened only a handful of times in the history of the S&P 500, and we just released a report to Premium subscribers highlighting how the market has historically performed going forward when the 20% mark has been eclipsed in the past. 


September 17, 2009 Posted by | Indicator setup | Leave a comment

Never Have So Many Stocks Been So Stretched Above Their 200ma.

Never Have So Many Stocks Been So Stretched Above Their 200ma.

Near the end of August I discussed that some of the breadth measures tracked by Worden were near all-time highs. This situation corrected itself as the market embarked on a brief selloff. Tonight two of their indicators actually registered their highest readings ever. These are T2109 and T21111 which track the number of stocks 1 and 2 standard deviations above their 200-day moving averages. Below is a long-term chart of T21111 with full history of the indicator going back to 1986.

I marked on the chart the 4 other instances that came close to the current reading. What you may notice is that these spikes were generally brief. Every case was followed by at least a mild selloff that worked off the severely overbought conditions. In no case did the extreme spike mark the end to the bull market that created it. It’s dangerous to read too much into only 4 instances, but a short-term pullback does seem reasonable. The current reading does not suggest a long-term top, though.

September 17, 2009 Posted by | Indicator setup | Leave a comment

U.S. stock market eyes investor cash still on the sidelines

NEW YORK (MarketWatch) — The U.S. stock market, which on Wednesday finished higher for a third straight day, is benefiting in part by the belief that money now collecting dust in the observation deck will eventually find a home in equities. “As you look at the cash-on-the-sidelines argument, it hypothetically represents pent-up demand for equities,” said Art Hogan, chief market strategist at Jefferies & Co.

U.S. money market fund assets most recently stood at $3.56 trillion, down from their March peak of $3.8 trillion, but still about double the amount of funds typically held, Hogan said. “There is always going to be some level of cash on the sidelines, but as the market gets better it comes down as investors take on more risk, whether it’s in stocks or bonds,” said Hogan, a scenario that helps explain the recent trend of stock and Treasury prices both moving higher when they more typically move in opposite directions. On Wednesday, energy and financial shares fronted the broad market’s gains after a slew of positive economic data, including a 0.8% climb in industrial production in August. Read Economic report.

“Until we see a reason to sell off there is enough money sitting on the sideline asking every day, where’s the top, am I missing this? Equity markets are seeing this money flow back in to some extent,” said Bruce Shalett, managing partner of Wynston Hill. Mountain views

But two equity analysts at Citigroup Global Markets Inc. question the premise of the so-called “mountain of cash sitting on the sidelines.” Writing in a research note earlier this month, Tobias Levkovich and Lorraine Schmitt write that of the trillions of money market funds reported by the Investment Company Institute, only $1.17 trillion can be attributed to retail funds or individual investors. Much of the remaining involves corporate or even government institutional money funds that may never find its way into the stock market, Levkovich and Schmitt write. “We suspect that the sentiment issue is more dominant and there has been some cooling off of the American equity culture that may take years to reinvigorate.” Hogan, for one, believes the Citi analysts may well have a point, saying some people may be “scared off from the stock market forever, thinking the game is rigged and that there is a plunge protection team” ready to jump in and maneuver the market. Kate Gibson is a reporter for MarketWatch, based in New York.

September 17, 2009 Posted by | Indicator setup | Leave a comment

Wall Street’s Math Wizards Forgot a Few Variables

Wall Street’s Math Wizards Forgot a Few Variables


Published: September 12, 2009
IN the aftermath of the great meltdown of 2008, Wall Street’s quants have been cast as the financial engineers of profit-driven innovation run amok. They, after all, invented the exotic securities that proved so troublesome.
But the real failure, according to finance experts and economists, was in the quants’ mathematical models of risk that suggested the arcane stuff was safe.

The risk models proved myopic, they say, because they were too simple-minded. They focused mainly on figures like the expected returns and the default risk of financial instruments. What they didn’t sufficiently take into account was human behavior, specifically the potential for widespread panic. When lots of investors got too scared to buy or sell, markets seized up and the models failed.

That failure suggests new frontiers for financial engineering and risk management, including trying to model the mechanics of panic and the patterns of human behavior.

“What wasn’t recognized was the importance of a different species of risk — liquidity risk,” said Stephen Figlewski, a professor of finance at the Leonard N. Stern School of Business at New York University. “When trust in counterparties is lost, and markets freeze up so there are no prices,” he said, it “really showed how different the real world was from our models.”

In the future, experts say, models need to be opened up to accommodate more variables and more dimensions of uncertainty.

The drive to measure, model and perhaps even predict waves of group behavior is an emerging field of research that can be applied in fields well beyond finance.

Much of the early work has been done tracking online behavior. The Web provides researchers with vast data sets for tracking the spread of all manner of things — news stories, ideas, videos, music, slang and popular fads — through social networks. That research has potential applications in politics, public health, online advertising and Internet commerce. And it is being done by academics and researchers at Google, Microsoft, Yahoo and Facebook.

Financial markets, like online communities, are social networks. Researchers are looking at whether the mechanisms and models being developed to explore collective behavior on the Web can be applied to financial markets. A team of six economists, finance experts and computer scientists at Cornell was recently awarded a grant from the National Science Foundation to pursue that goal.

“The hope is to take this understanding of contagion and use it as a perspective on how rapid changes of behavior can spread through complex networks at work in financial markets,” explained Jon M. Kleinberg, a computer scientist and social network researcher at Cornell.

At the Massachusetts Institute of Technology, Andrew W. Lo, director of the Laboratory for Financial Engineering, is taking a different approach to incorporating human behavior into finance. His research focuses on applying insights from disciplines, including evolutionary biology and cognitive neuroscience, to create a new perspective on how financial markets work, which Mr. Lo calls “the adaptive-markets hypothesis.” It is a departure from the “efficient-market” theory, which asserts that financial markets always get asset prices right given the available information and that people always behave rationally.

Efficient-market theory, of course, has dominated finance and econometric modeling for decades, though it is being sharply questioned in the wake of the financial crisis. “It is not that efficient market theory is wrong, but it’s a very incomplete model,” Mr. Lo said.

Mr. Lo is confident that his adaptive-markets approach can help model and quantify liquidity crises in a way traditional models, with their narrow focus on expected returns and volatility, cannot. “We’re going to see three-dimensional financial modeling and eventually N-dimensional modeling,” he said.

J. Doyne Farmer, a former physicist at Los Alamos National Laboratory and a founder of a quantitative trading firm, finds the behavioral research intriguing but awfully ambitious, especially to build into usable models. Instead, Mr. Farmer, a professor at the interdisciplinary Sante Fe Institute, is doing research on models of markets, institutions and their complex interactions, applying a hybrid discipline called econophysics.

To explain, Mr. Farmer points to the huge buildup of the credit-default-swap market, to a peak of $60 trillion. And in 2006, the average leverage on mortgage securities increased to 16 to 1 (it is now 1.5 to 1). Put the two together, he said, and you have a serious problem.

“You don’t need a model of human psychology to see that there was a danger of impending disaster,” Mr. Farmer observed. “But economists have failed to make models that accurately model such phenomena and adequately address their couplings.”

When a bridge over a river collapses, the engineers who built the bridge have to take responsibility. But typically, critics call for improvement and smarter, better-trained engineers — not fewer of them. The same pattern seems to apply to financial engineers. At M.I.T., the Sloan School of Management is starting a one-year master’s in finance this fall because the field has become too complex to be adequately covered as part of a traditional M.B.A. program, and because of student demand. The new finance program, Mr. Lo noted, had 179 applicants for 25 places.

In the aftermath of the economic crisis, financial engineers, experts say, will probably shift more to risk management and econometric analysis and concentrate less on devising exotic new instruments. Still, the recent efforts by investment banks to create a trading market for “life settlements,” life insurance policies that the ill or elderly sell for cash, suggest that inventive sales people are browsing for new asset classes to securitize, bundle and trade.

“Good or bad, moral or immoral, people are going to make markets and trade via computers, and this is a natural area of financial engineers,” says Emanuel Derman, a professor at Columbia University and a former Wall Street quant.

September 14, 2009 Posted by | Uncategorized | Leave a comment

The International Evidence of the Overnight Return Anomaly


The International Evidence of the Overnight Return Anomaly

Tao Cai
affiliation not provided to SSRN

Mei Qiu
Massey University

August 21, 2009

Using daily stock index data of 29 countries, we find that overnight nontrading period returns are significantly higher than both trading period returns and close-to-close daily returns in 23 countries. One possible explanation for this phenomenon could be an assertion made by Miller (1977) that divergence of opinions may cause overpricing of securities when short selling is constrained. As divergence of investor opinions build up during the overnight nontrading period, stocks tend to be overpriced when the markets reopen and then drift back to their equilibrium during the trading hours. In fact, we find greater differences between overnight return and trading-hour returns for countries having short sale constrains as against the countries not having short sale constrains. Further, volatilities of overnight returns are greater than volatilities of trading period returns in short selling constrained markets but vice versa in markets without short selling constrains. 

Keywords: overnight, return, short sale constrain

JEL Classifications: G14

Working Paper Series

September 14, 2009 Posted by | Tools | 1 Comment

BDI 與債息


BDI 與債息

法興銀行著名策略師 Albert Edwards 似乎知道老畢開邊瓣,在今日刊發的每周分析報告中,以圖表形式,比較了運費指數與德國十年期政府債券孳息走勢,發現債市與股市一樣,形態和方向跟 BDI 非常相似,而運費指數同樣走在債息之先【圖】。何以用德國十年期債息作比較基準,Edwards 未加說明。


觀圖看勢,BDI 自6月初高位回落四成,CRB 商品指數6月至今亦見阻力重重,德國債息則偏軟……。看樣字,被拿來跟運費指數 pair up 的指標,大都在等候股市確認弱勢。雖說大政府當道,積極造淡並非上策,但不為風險資產轉勢作對沖,風險可能更高。


September 11, 2009 Posted by | Cross-asset-class | 1 Comment

Market Timing Using a Moving Average

Market Timing Using a Moving Average

Mebane (me-bany? mee-ban?) Faber has a well-read paper on the SSRN concerning market timing (A Quantitative Approach to Tactical Asset Allocation). I think this because the article is pretty simple, and it seems to work. It’s incredibly easy to understand, accessible to anyone who uses Excel. He took the 10 month moving average rule proposed by Robert Siegel in his 2008 edition of Stocks for the Long Run, and found it worked in a variety of markets. I’ve seen a lot of market timing rules and find most stink, so I looked at the data myself, expecting it not to work.

I used the monthly data from Ken French’s website. I went long the market if the index was above its 10 month moving average, went to T-bills otherwise, where ‘the market’ is the value-weighted US composite. The arithmetic return was slightly higher simply always being long (10.7% vs. 10.0%), but given the volatility of the long-only rule was 50% higher, its geometric return was about the same (9.3% vs. 9.2%). The Sharpe ratio using this index data suggests the market timing rule significantly helps one’s investment, taking it from 0.30 to 0.46 in this 1926-2008 period.

US 1927-2008
Long vs. Market Timing Based on 10-Month Moving Avg.

  Regular Timing
GeoRet 9.3% 9.2%
ArithRet 10.7% 10.0%
StDev 19.0% 12.2%
Sharpe 0.30 0.46

The result is pretty robust, in that it does not drop off dramatically using a 6-month moving average, or an 18-month moving average.

You can see that the main periods of outperformance were from the 4 big bear markets: 29-33, 73-75, 2000-02, and 2007-08. Perhaps in a simple moving average rule is a wise investment strategy. I would want to look at international data to become more certain, but it’s interesting.

September 11, 2009 Posted by | Trend Following | Leave a comment

Baltic Dry Index Continues Leading The Stock Market

Baltic Dry Index Continues Leading The Stock Market

Published September 7th, 2009 in Trading Tags: , , , , , , .

While the Baltic Dry Index is a leading economic indicator, lately, it has been also behaving as a leading indicator of the stock market.

I hinted towards this early in the year when it looked like it had put in a significant bottom and I wondered if the Baltic Dry Index would lead the stock market higher. Of course, we now know it certainly did.

The index measuring international shipping rates around the world bottomed in early December 2008 three months ahead of the stock market (green arrows):
Baltic dry index leading stock market SPX chart comparison Sept 2009

In fact, if you compare the S&P 500 index for the past few years with the Baltic Dry Index (BDI), it would seem that shipping rates have lead the equities from 1 to 3 months in both rallies and tops (take a look at the marked points on the chart above).

Of course, the relationship is fuzzy and not a one to one, up and down, direct correlation. But in all its fuzziness, you can still make it out rather clearly. You can even see that about a month before the stock market went into a waterfall decline last year, the BDI broke down below its low and started on its head first dive.

So what is it saying now?

The BDI topped out in early June 2009 at 4291 and has since been in a downtrend. In keeping with the same approximate time lag, we would expect the stock market to top out in late August or early September. Which is right about now. We’ve been underwater since the S&P 500 index hit 1031 on August 27th, 2009. Now, I’m not suggesting that you trade just on this type of thing but it does provide an interesting context. Especially when you consider everything else which is telling longs to be cautious.

If you just joined us, we went over multiple reasons for bearishness in the past weeks sentiment overview as well as the newly inflation adjusted mutual fund cash levels indicator.




Bears, keep the faith

Posted by Neil Hume on Sep 10 09:54.

It is not much fun being a bear at the moment with seemingly everything going up – except the US dollar. But there is still hope, according to Soc Gen’s Albert Edwards.

In his latest Strategy Weekly he draws our attention to the recent performance of the Baltic Freight index, which is some 40 per cent off its June high.

I was reading the other day the blog of my former colleague Daniel Pfaendler, who was making some interesting observations on bond yields and the Baltic Freight Index which we replicate on the cover chart. He believes the weakness of commodities is evidence that the Chinese commodity re-stocking cycle is drawing to an end. He cites Trader’s Narrative blog – that suggests equity investors should also be watching closely.

Here’s why.


Scary huh? Albert thinks so.
An end of the Chinese bubble of belief will have serious consequences for the global financial markets. For those who are looking for a trigger for a retrenchment in equity markets, we suggest watching the RJ/CRB and Baltic Freight indices closely.

And here’s the recent performance of the RJ/CRB commodity index.


Some way off its August highs.

And there’s one more thing Albert thinks investors should be looking for. (Emphasis ours).
It’s almost as if the biggest credit bubble in history never occurred.

Investors are increasingly convinced that a sustainable global recovery is emerging out of the wreckage. All praise to the central bankers (and Gordon Brown) for saving the world!

I’m waiting till someone writes about the return of The Great Moderation and suggests Ben Bernanke is the new Maestro. Then I’ll know the lunatics have taken over the madhouse…..yet again!





September 10, 2009 Posted by | Cross-asset-class | Leave a comment

Google Domestic Trends

Google Domestic Trends

by CalculatedRisk on 9/08/2009 12:46:00 PM

Here is an interesting resource from Google: Domestic Trends. (ht Brian) Google is tracking search trends for several specific sectors of the economy.

As an example, below is a screen capture of the Auto Buyers Index.

Google Auto Buyers Index Click on graph for larger image in new window.

This shows the seasonality of car buying, plus the Cash-for-clunkers surge in searches. Click on link for interactive graph – you can also plot the data YoY.

I also recommend real estate, rental (still weak) and unemployment.

September 10, 2009 Posted by | Google / Internet | Leave a comment