Quant Macro Investing

Risk Taking Disciplined

Engineering targeted returns and risks

From Bridgewater Associates (2005) – click here

January 4, 2010 Posted by | Case Study, Cross-asset-class | Leave a comment

CDS vs stock index changes

A post on CDS (credit default swap, also here), which attracted interesting replies.  You are welcome to join the discussion.

1.  Very interesting feedback from reader “Frank Fong”:

I have done a analysis on the %CDS change and the corresponding country stock index YTD %.
It shows a correlation about -0.27.
Moreover, I use CDS YTD price change to replace %change,
the result shows -0.32.
It may mean that for emerging markets(higher cds price), their sovereign risk is more related to their index return.

2. (Feedback from me) So that is pretty low correlation…

However, I believe that when CDS moves big way (in whatever % change we define), stock index likely moves.

If there exists some consistent lead time move between them (say CDS usually moves big, then stock market moves big the other way), one can be used as “event risk” indicator to the other…

3. Subsequent email feedback from another “reader”:

The cds price does not vary linearly with cds yield.  The mechanism calculating CDS yield and stock index yield is similar.  I am not suprised to see the correlation btw cds yield and stock index yield is larger in magnitude.  The two correlations show roughly the same information in my opinion.

I am more concerned about finding event risk indicator.  Events which indicate large CDS movement leads to large market movement are not frequent in occurance over a long period so the statistical result may not be significant in identifying such events.  How could you infer such findings?

October 22, 2009 Posted by | Case Study, Cross-asset-class | Leave a comment

Relative Strength Rotation


With markets roaring back and the SPY having broken $110 for the first time in over a year just moments ago, it seems that Relative Strength Rotation methods have come back into vogue.

There are literally dozens of ways to define relative strength, and it is important to recognize that different computations will serially and stably outperform their peers during various behavioral epochs. Furthermore, inflection points can be harsh using this method. Various smoothing methods, use of multiple time frame references, a modicum of forced diversification, and standard money management techniques can all be a big help with that. All in all, it’s a hard strategy to beat over time for those interested in always being invested.

Below I present two very basic mechanical trading systems employing rankings of current price divided by variously weighted simple moving averages among the selected ETFs. (The specific relative strength readings for which are provided every night in ETF Rewind* under the “Weighted Strength” column for nearly 200 tracking ETFs.)

Asset Class Rotation

The chart below indicates the equity curve that would have resulted from rotating into the single top performing major asset class ETF among the SPYEFA,EPPEEMDBC and AGG, as ranked according to relative strength, then re-balancing weekly on a simple/ non-compounded basis, with no friction/ trading costs assessed.

The compound average annual growth rate for the nine-year study period would have been +10.7% with a simple Sharpe Ratio of +0.5 and a maximum peak-to-valley draw down of -19.4% (versus the S&P500’s -51.8%). The equity curve is not optimized in any way, and involves no use of leverage or shorting: this is merely an extremely simple macro-asset-class switching method.

Currency Rotation

As currencies have been highlighted in the news lately, attached is a graphic highlighting another simple strategy rotating into the top two performing Currency ETFs among UUPFXABZFFXE and FXY, re-balancing weekly on a reinvested/compounded basis, with no friction/ trading costs assessed.

The compound average annual growth rate for the three-year study period would have been +14.2% with a simple Sharpe Ratio of 2.4 and a maximum peak to valley draw down of -8.9%.


At the very least, relative strength systems can provide natural stops for equity traders and additionally inform them as to which classes, sectors, styles and countries are running hot or cold in the current market environment. At their best, they can make for powerful trading systems in their own right.

October 21, 2009 Posted by | Cross-asset-class, Indicator setup | Leave a 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

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

































September 9, 2009 Posted by | Cross-asset-class | Leave a comment