Posts filed under “Trading”
A few weeks ago, Yale Professor Robert Shiller won the Nobel prize for his work on irrationality and inefficiency of markets. Since then, we have been treated to a plethora of stories on some of his other work — especially so-called CAPE, Shiller’s measure of long term valuation. The general consensus seems to be that CAPE — the cyclically adjusted price-to-earnings ratio – is elevated, stocks are overvalued, and a crash is imminent.
This is a misreading of both valuation measures, as well as causes of crashes.
CAPE looks at the prior 10 years of trailing earnings. It smooths out any given quarters’ ups and downs, and theoretically includes a full business cycle. The way Shiller intended it to be used was to create a valuation metric that would suggest whether stocks are likely to outperform their average returns over the next 10 years.
Shiller’s CAPE does this well. As Mebane Faber of Cambria Investment Management observed, when CAPE measures are under 10, forward 10-year returns are outstanding. Over the long run, returns fall the higher CAPE rises. However, over the short run, it is anyone’s guess. The range of returns when CAPE is elevated is fairly broad. Indeed, CAPE has been over 20 for the past few years, and U.S equity returns have been strong.
Source: Mebane Faber
The problem we run into is that valuation is not a timing tool. A momentum trader will tell you from personal experience that overpriced stocks can and do get more expensive. Value investors will tell you from their personal experience that cheap stocks can get a whole lot cheaper.
Mean reversion does not occur immediately after an asset moves away from its long-term trend. Any bond trader can tell you that from their personal experience of the past 30 years.
Nanex did some digging into market data before the Nasdaq blackout at 12:20 EDT on August 22, 2013. They discovered several significant periods of extremely high quote volume. By plotting the number of messages for each of the 6 multicast lines used by the Tape C SIP (Securities Information Processor), we discovered the quote blasts map directly to individual multicast lines.
Note that this is the data feed that Nasdaq claimed as the source of he bad data.
“The first chart above plots the number of messages for each multicast line between 10:50 and 12:10 EDT. Note there are several message surges: each of which is confined to an individual multicast lines (single color). The surge on line #6 at 10:55 (red line) is from zeroed bids and asks from ARCA (this is detailed in another chart below). The 3 surges at 11:48 (blue), 11:50 (red) and 11:54 (green) are actually from a resending of the previous 50 minutes worth of quotes as if they were new quotes. Each quote had a new timestamp and marked as if it were real-time – which caused these quotes to update the NBBO! We detail this in the stock ORLY in 2 below.”
We are slowly destroying the core structure of our capital markets.
We previously discussed what actually happens at the end of Trading Places (July 20th, 2013). As a follow up, Businessweek cornered legendary actor, comedian and entrepreneur Dan Aykroyd to find out why “Trading Places” is the greatest business movie of all time. Bloomberg, August 6 2013
Wherever you see red in the charts below, that’s when HFT received an unfair trading advantage and front ran other traders and investors. Click through, scroll down a bit, then hit start for samples of HFT front running Source: Nanex Nanex observes that: “Each chart plots trades and quote spreads from Nasdaq and…Read More
Exchanges Live In Glass Houses Joe Saluzzi, Sal Arnuk Themis Trading, July 2, 2013 The head of US Market Regulation for Nasdaq, John Zecca, just published a one page article titled “A Level Playing Field For Surveillance” . In his article, Mr. Zecca is calling for increased surveillance of dark pools. Specifically, Mr….Read More
Back in my days as a trader, I would peruse the lists of 52 week lows looking for reversal candidates. The key was finding an intelligent entry that had a very tight stop, so it presented a good risk reward. I am happy to risk one dollar to make three. Slowly build the position over…Read More
Really traders!?! Did you really believe that the Fed was never going to stop buying bonds? Really?!?
Do you think that the Fed was going to have an infinite accommodation, and that rates were going to stay at zero forever? Is that what you expected from the Central bank. C’mon, Really!?
And what about the dreaded hyper-inflation you have been warning us about for so long? Inflation has been so low for so long that it had its name legally changed to Deflation. Really!
Source: Trading Economics
Where you out the day Bernanke said he was targeting Unemployment, which has fallen from nearly 11% to 7.6%? Did you forget about that? Really!?!
And this entire Risk On rally — did you really think it was going to last forever? Really? US Equity are up nearly 150% over the past 5 years, didn’t you think it had to eventually slow down? Did you actually believe Markets were a uni-directional bet? Really?!?
The Fed has a dual mandate — stable prices and maximum employment. Did you really think there was a third component of maximizing your risk free equity returns? Really!?
This has been Really!?! With Ben & Janet.