Posts filed under “Quantitative”
Kevin Lane is one of the founding partners of Fusion Analytics, and is the firm’s director of Quantitative Research. Prior to joining Fusion Analytics, Mr. Lane enjoyed success as the Chief Market Strategist for several sell side institutional brokerage firms, where he made unique and savvy market predictions. In those capacities he oversaw the firms’ research departments and was the main architect for developing their proprietary stock selection models and trading algorithms. He produced a broad range of widely followed institutional research publications ranging from industry specific notes to quantitative/fundamental reports on individual stocks. His buy side clientele consisted of many of the nations top money managers and hedge fund managers. Mr. Lane is a member of the Market Technicians Association.
The Numbers Don’t Lie …
The reason we like statistical and technical analysis is for one simple reason, the number don’t lie. The numbers are unemotional, they don’t fall in love with stories, the don’t get passionately bullish or bearish they just are what they are. Now the downfall of the numbers like any method of following the market is they are nowhere near perfect (but then again what is ?). However the numbers are a direct reflection of the market, they are not manufactured or manipulated. Again they are what they are and in that’s the beauty of it.
When we say “the numbers” we talk about things such as new highs vs. new lows, advancing stocks vs. declining stocks, the continuous level of up volume versus down volume, the deviation in the VIX Index from its normal trend to name a few. Within FusionIQ we monitor even statistics such as the % of stocks that are in various scoring ranges such as; Bullish (stocks ranked 70 – 100), Neutral – (stocks ranked 40-70) and Bearish (stocks ranked less than 40). We also monitor the number of new BUY signals vs. new SELLS signals to see which way the markets near-term directional bias is tilting. Again not that these are perfect indicators but when they all start to align in either a bullish or bearish way it gives you a higher degree of confidence that you are on the right side of that market and that is what this game is all about. Stock picking to some degree is only as good as which way they market tide is going. (Though you will always get a few names that buck the trend the majority of issues move in sync with the market)
In fact one of the main determinants that moved us negative very early was the large number of stocks ranked in FusionIQ that fell into its bearish category six and nine months ago. Again not that the numbers are always right but when 65 % of all stocks in our ranking system are ranked lower than 40, that has to raise a red flag. As I said before we don’t make the numbers but the fact that a large number of issues went below 40 rankings (the scores were clearly driven down as we know now by external factors as well as supply and demand) certainly demanded attention. When readings such as this are combined with other pieces of unbiased confirming evidence such as new lows every day in the cumulative advance-decline line for the S&P 500 and more new 52 week lows than 52 week new highs (consistently) it really connects the dots.
That said most of these aforementioned indicators still have poor readings hence why we keep repeating that one should play it closer to the vest for now and make lighter capital commitments until these statistics improve off the lows .
Look for out S&P 500 and NASDAQ 100 pieces to be published this coming Monday.
Contact Peter Greene for more information about institutional research & trading:
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> Excellent commentary about FusionIQ in this weekend’s Barron’s: Separating potential winners — and losers — from the herd. MARKETS LIKE THIS DEMAND A CLOSER LOOK before you leap. Fortunately, there are plenty of online resources to guide you. Some are oriented toward fundamental analysis, some toward technical signals, and some, like FusionIQ (www.fusioniqrank.com), incorporate…Read More
MIT’s Andrew Lo: The key concept here, developed by MIT professor and noted hedge-fund theorist Andrew Lo, is “serial correlation.” Simply put, serial correlation is the degree to which each month’s returns in a fund mirror the results of the month before. A fund that returns the exact same amount every month is perfectly serially…Read More
2008 has again been a good year for FusionIQ and its research team. Below are some cherry picked excerpts from Fusion’s various research publications: ● 10/22/07 Bank Index Review (BKX) – “Many of the BKX components: C, CMA, COF, FITB, RF and WM have extremely low technical scores in our FusionIQ quantitative ranking with scores…Read More
One of the strange aspects of running a quant shop is watching some of the fundie guys downgrade previously beloved names long after they have been spanked. Let’s cherry pick a few charts and work our way through them. We’ve noticed this with GM, AIG, and many others recently. Today’s silly downgrade is US Steel….Read More
To most traders and investors, Barry Ritholtz is the voice of The Big Picture, one of the more popular financial blogs on the Internet. Now hosted at ritholtz.com, The Big Picture was one of the more prominent financial must-reads for traders and active investors during the second half of the Bush years. Some of the earliest concerns about the credit crisis and the housing bubble in the financial blogosphere were posted at The Big Picture – a blog that now boasts over a 29 million visitors and 39 million page views.
Barry Ritholtz is the man behind The Big Picture. He is CEO and Director of Equity Research at Fusion-IQ, an online quantitative analysis research firm. He was also recently the Chief Market Strategist for Maxim Group, a New York investment bank, managing more than $5 billion in assets. He is a frequent guest commentator in print, online and broadcast financial media including CNBC, Bloomberg, PBS and Fox Business.
His firm is also responsible for creating an online software tool, at Fusion-IQ, that uses his proprietary metrics to quantitatively rank more than 7,000 stocks and 400 industry groups. The Fusion metrics are backtested and used by both retail and institutional-level investors and traders.
I spoke with Barry Ritholtz by telephone the day after the Presidential election in November. We talked about ETF trading, contrarian trading and creating stories and narratives to help explain the cold, hard probabilities of quantitative analysis. What follows is an edited transcript of lively and insightful conversation with Mr. Big Picture, Barry Ritholtz:
David Penn: First, off I have to ask you about something I saw on The Big Picture this morning about exchange-traded fund (ETF) trading. ETF trading is something we have been very interested in, as well. You had a blog post about exchange-traded funds and leverage exchange-traded funds, particularly the new 3 to 1 ETFs
Barry Ritholtz: We do a ton of ETFs lately.
Penn: Do you? Let me just get your general overview on the rise of leveraged ETFs – including the new 3 to 1 leveraged funds. How effective do you think they are? Why should be traders be interested in them?
Ritholtz: ETFs do some really interesting things. We are bottoms up stock pickers, but in this environment, ETFs make sense. If you want any sort of instant exposure to a sector, a stock, a region, ETFs are just really, really simple, fast and painless. ETFs work well for that. The leveraged funds are really interesting.
Just for a little background: we came into this year (2008) very bearish. We had plenty of longs, but over the summer we were probably more cash than we’ve ever run, 50 to 60 percent cash in our managed accounts. Then as we went through August and into September, well, we have a couple of pretty firm rules about stock losses. We always manage risk by using stop losses. We have some other rules, but it’s long and complicated.
When a stock is working out for us, we try and raise the stop to a breakeven. If you have a big winner, we never want to give back 25 percent of the profits. And there are other mechanical ways of preventing yourself from riding what we like to call the “Cape Matterhorn” stock. Think of Apple in the 1990s; you had a run-up on the iMac introduction. It went from single digits to 100 plus, then back to single digits. This time, with the iPod and the iPhone, it hasn’t quite re-completed the round trip, butits given a ton back. There are plenty of people who ride stocks all the way up, and then don’t know what to do with them and of course, they ride them all the way back down. Ouch.
We hate doing that. So we came into the October lows with just an inordinate amount of cash and a lot of nervous clients. And when we made our bull call on October 10th – which may end up being just a cyclical trading rally, we don’t know and we won’t know for a couple of weeks — there was a real concern of, “I can’t believe you guys are buying here. You’re crazy.” [EDITOR: A similar buy call was made in real time on November 13th, and again, and again, no one complained]
So the approach we took was, let’s buy the two-for-one leverage SSOs (ProShares UltraS&P 500 exchange-traded fund), which are the S&P 500 X 2, and QLDs (ProShares UltraQQQ exchange-traded fund), which are the NASDAQ X 2. And at the same time, we maintained a 50 percent cash position.
Penn: An interesting approach.
Ritholtz: Yes. In a very strange turn of events, we had 100 percent market exposure and 50 percent cash, which if you stop and think about it, is a nice little trick to do.
We could have just gone 100 percent stock, but we never like to pick our points that way. The way that capital deployment worked, it gave us the upside exposure we wanted and yet, at the same time, maintained a modest amount of risk via our cash holdings. Since we don’t care about the actual market movements relative to an individual equity when it comes to stock losses, we had the same stops on the two-for-one leverage stock as if it were GE. It didn’t make any difference. Once it gave up a certain percentage and crossed certain key technical support lines, we were done, we get stopped out — trade over. But that hasn’t happened, so it really gave us this strange and interesting move, relative to what happened.
Penn: What has happened since?
I did a fairly comprehensive interview with the guys over at TradingMarkets.com. We discussed a lot of issues not usually covered in most interviews — quant analysis, probablity theory, uncertainty as the standard condition regarding the future. Some of you might find it kinda interesting: Trading the Big Picture: A Conversation with Barry Ritholtz David…Read More
Dan Greenhaus is with the Equity Strategy Group of Miller Tabak + Co. He put out this fascinating analysis of what “Novembers” typically hold in store for us after nasty “Octobers” Dan writes: > Okay, so we all know October was down a fantastically ugly 16.94%, the steepest decline since 1987 when that October declined…Read More
Nova discusses fractals, and the significance for various disciplines, such as Physics, mathematics and even markets:
Click for Video
In five parts:
They’re odd-looking shapes you may never have heard of, but they’re everywhere around you—the jagged repeating forms called fractals. If you know what to look for, you can find them in the clouds, in mountains, even inside the human body.
running time 11:36
THE MANDELBROT SET
In 1958, Benoit Mandelbrot begins using computers to explore vexing problems in math. They help him to understand repeating patterns in nature in an entirely new way. He coins the term fractal to describe them and develops the Mandelbrot set in 1980.
running time 9:51
ON THE DEFENSE
Though many colleagues initially scorned Mandelbrot’s work, his mesmerizing fractal images launched a popular culture fad. More importantly, his book The Fractal Geometry of Nature explained how his ideas could be applied in the real world. Mandelbrot’s ideas inspire an ever-increasing number of applications, including the fractal antenna.
running time 10:40
FRACTALS IN THE BODY
Fractal patterns turn up everywhere in biology, from the irregular rhythm of the heart to basic eye function. The fractal nature of such physiological processes, which obey simple mathematical rules, offers hope of better diagnosis and treatment of problems as well as new insights into how such processes work.
running time 10:15
NATURE’S FRACTAL NATURE
With carbon dioxide levels around the world rising, a team of American scientists travels to a rain forest in Costa Rica. They employ fractal geometry to analyze how much CO2 the rain forest can absorb.
running time 7:52