Author: Student

Shiller using the P/E Ratio to predict the “Lost Decade” in 1996 – and being wrong

From Wes’ excellent research digest: The theory that the stock market is approximately a random walk does not look right at all: Figure 1 is a (log-log) scatter diagram showing for each year 1901–1986 the ratio of the real Standard and Poor Index ten years later to the real index today (on the y axis) versus a certain price–earnings ratio: the ratio of the real Standard and Poor Composite Index for the first year of the ten year interval, divided by a lagged thirty year moving average of real earnings corresponding to the Standard and Poor Index (on the x axis). Index values...

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Out-of-Sample Backtesting of Calendar Effects on the STI, Interaction with Momentum

I have published my philosophical thoughts on Calendar Effects in my CFDAlert white paper previously. This was before I was able to extend my data back a further 10 years. If you are new to the blog and have not read my abstract: the current Calendar Effect strategy I adopt is the most naive I can imagine. It is based on the empirical observation that odd-numbered years and Decembers reject the null hypothesis of no effect at higher than a 99% confidence level. This effect has been persistent through the three decades in which I have been able to...

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In Case You’re Still Thinking “Stocks For The Long Run”

[unable to retrieve full-text content]You know that thing about pictures and thousand words? Yeah. This chart has gotten two reactions from my friends working in finance: The data has to be wrong! (it is not) (if they accept the data is right) How is this possible? Well for one thing, I’m no govt bond investor but I don’t actually...

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The After-Cost Effect of Daily Follow-Through

[unable to retrieve full-text content]I have examined the naive DFT strategy in a prior post. Only recently have I been able to quantify just how astounding the figures are if you trade the strategy cost-free. Starting with $2,000 in 1975, you end up with $3.4 billion dollars at 31 Aug 2011 – a rate of compounding of 31%, and that’s...

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Something Rotten in The State Of Data

For a long while now something has smelled fishy in my extensive backtesting of Bloomberg-sourced data, and today I have finally tracked it down: If you check out my amateurishly maintained, hand collected data pulled off from Bloomberg you will see that I keep separate track of Price time series as well as Total Return Index (“Trice” for short) time series. The idea is that, of course, if you are holding the underlying stocks, you get the total return, which is higher than the raw price return so long as the dividend yield is >= zero (thus, for example, explaining...

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The Importance of Accounting for Trading Costs

Posted by Student on August 28, 2011 Accounting for trading costs is in my book the top failure of most technical analysts: If you have a signal that generates a high zero-cost return, but trades so often that you definitely incur a lot of commissions, do the costs eat up all of the returns? Because of the highly nonlinear structure of brokerage/commission costing systems there is often no “analytic” way to arrive at an estimate of after-cost returns given just the costing system and the raw before-cost returns, very often because the way in which the commissions eat into...

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I’m Back – A General Update

This month I embarked on a “Golden Month” of research – and I had NO idea what was in store both in live trading and in research. Live Trading – Our CFDAlert system took heavy damage after the S&P downgrade but we severely cut down risk by August 5. No changes to the signals have come since then as the markets continue to look bearish without end. I chuckle when I hear people panicking and selling or buying based on what Bernanke may or may not do, or close to home on news that Singapore May Enter Recession –...

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On Robots, Short-Sellers, and Insider Trading

This week has given rise to a host of extremely odious arguments from non-finance specialists, media people, and regulators. People who do not think and therefore, per Descartes, should not exist. I here use my soapbox to share thoughts with my readers who deserve better. Robots. People have raised the specter of HFT/algo trading to explain the volatility. You cannot prove a negative, but you can show that it is not a sufficient condition and by extension probably not a necessary condition. Short-sellers. Euro governments have started banning short-selling again. Won’t be long before it happens in the US in...

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Banging The Close

Posted by Student on August 10, 2011 One last qualitative piece, for this month. What to make of market reaction to the FOMC statement, and where will sentiment go from here? I don’t know. People in finance don’t say that enough. But we guess because we have to. Even inaction is an action, and we all would prefer to have our actions based on fact/knowledge/theory instead of chance. As Ken Arrow is fond of quoting, “The Commanding General is well aware the forecasts are no good.  However, he needs them for planning purposes.” Assessment As was widely expected, the FOMC put...

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Close Out Your Shorts TODAY; Watch For Bernanke Put

Sorry if you are only here for my quantitative material, but I feel compelled to put out a qualitative opinion for the record. Be greedy when others are fearful, and fearful when others are greedy. If you have been a short seller then you are the proud owner of some wonderful profits. Here are a few short ideas I have discussed on this site: I have closed out all my shorts. When you have a social group like mine you tend to spend an extreme amount of time discussing the recent past i.e. this Friday’s downgrade. Fortunately the CFDAlert...

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Is There A National Day “Rally” Effect?

Posted by Student on August 6, 2011 Now that the downgrade we discussed in CFDAlert (on July 20, in an unposted email “Suddenly Everyone Is So Happy! Buy!!”, and in The Coming US Downgrade) has happened, it is a very open question what will happen to our markets on Monday as the STI will be acting without its usual guidance from the US. I thought it might be interesting to have a look to see if there was a “National Day Rally” effect, partly because it would be humorous if there were and would make for good dinner conversation....

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What Happens After A 4% Drop In The STI?

Posted by Student on August 5, 2011 Since 1975 the STI has dropped >4% on 52 occasions. Here is how they look on subsequent days: You can clearly see those dates on the right hand site closely correspond to the periods of high volatility, of the good kind as well as the bad kind (the full list of 52 dates got cut off, sorry). We can make the chart less messy by taking only averages: Which shows a typical post-4%-drop rebound in a slight majority of cases. The above is “weighted by volatility” in that we observe multiple instances...

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Singapore Comes In World #1 In Demographic Forecast Of Stock And Bond Markets

Posted by Student on August 4, 2011 I got a minor shock when I found these two charts: This is a Research Affiliates paper so it carries extremely high credibility. The paper arrives at this forecast via a complicated route – forecasting GDP per capita growth instead of simply GDP. Also it takes the assumption that “Young people are focused on investing in stocks and providing goods and services to the market; old people are focused on pulling equity capital from the markets, investing in bonds, and consuming goods and services.” Basically, I’ve seen this hypothesis a dozen times. Higher dependency ratio =...

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X-Div: Raffles Class

Don’t tell anyone, but a big part of today’s sizable 38 point drop in the STI surely had NOTHING to do with: the US debt crisis the US PMI crisis the US employment situation crisis the EU debt crisis the China overheating crisis the Japan reality denial crisis the Australian housing crisis the Brazilian stock market crisis your favorite crisis of the moment What’s more, today’s drop was largely predictable and interestingly reflexive. Predictable – Today was the day SIA went XD, with a special dividend to the tune of $1.40 per share (on a share price of about $14)....

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