Archive for December, 2009

Happy New Year 2010 Trends

Growth in happy new year search

Happy New Year Wishes from all of us at Orpheus

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Orpheus India Outlook 2010

Absolutely speaking India is in trading range for 2 more years, relatively speaking it’s time to shift allocations.

It’s the time of the year, where we account for what we got right and where we were off mark. This is what we said in our annual outlook in Jan 2009 and what happened.

Anticipated - ‘We won’t be surprised if prices retest October lows or breach them marginally in early Q2, 2009. And this means selective stock picking and minimizing market exposure by doing quantitative long short strategies. 13,000-15,000 is an achievable high for Sensex in 2009.’

Happened - Sensex touched 15,521 in Jun 09 and now prices are 16% above 15,000. The Oct 09 low 7,699 was tested marginally in Mar 09 at 8,047.

Anticipated -’BSE Metals was the worst performing sector of the year at -72 returns. We expect it to deliver better returns’

Happened - BSEMETALS was up 339%

Anticipated -’Long BSE500 and short Sensex also seems an attractive pair’

Happened - The pair was up 14% till date from Mar lows, up 5% from Mar – Jun 09.

Anticipated - ‘Don’t get too much into the negative mode despite all crisis talk.’

Happened - Assets moved up 100% to 300% after Mumbai attacks. You can’t say we did not try to convince you. We wrote on ‘History, markets and terror’ explaining why the Mumbai attacks didn’t happen at a market top. We wrote ‘Russia Oil and the Global low’.

Anticipated -’The expected bounce should be choppy and time consuming.’

The markets rose clearly from Mar to Jun and then got into choppy sideways action.

Anticipated - ‘The tech reversal - 26 Jan 09’

Happened - Technology reversed and pushed up 191%.

Where we got it wrong

24 July in our half year outlook we said

Anticipated -’We repeat the best of 2009 is nearly over and any upside from here should barely reach double digits (less than 10%) for the 12 indices we discussed above’

Happened - Though BSEOIL, BSEFMCG, BSEREAL, BSEPOWER did not cross 10% gains since 24 July high. The rest of the nine indices broke the 10% barrier. On average all sector indices registered 19% gains since 24 July.

Though we said the expected bounce should be choppy and time consuming, there were sectors and indices that grew without a pause like CNXIT.

‘Performance cycles’ is a term coined by us at Orpheus. This is another name for time triads, time arbitrage, time fractals but expressed in terms of relative performance. It’s a bounded oscillator that moves in a fixed range say 1-30. 1 is top relative performance and 30 is worst performance. The idea is that performance is cyclical. A top performer will underperform in future and vice versa. A top relative performer is also the worst value pick and the top relative underperformer is the best value pick. We have carried the quarterly Numeric Ranking for Nifty 50.

Top performers for Q1 2010 – Reliance Infrastructure, Grasim, Reliance Com, Bharti, Reliance, L&T, Jaia, Dlf, Idea, Ambuja, Reliance Cap, Reliance Power, Suzlon, Unitech, ABB. The top underperformers for Q1 2010 are Punjab National Bank, Jindal Steel, Cipla, TCS, Tata Motors, Wipro, Ranbaxy, Tisco, HDFC Bank, SBI, SUN, M&M, Infosys, GAIL, and SAIL. The passive way of investing using performance cycles assumes that you have 30 stocks with 10,000 Euros each in the 30 stocks. Now you close the top underperformers and reinvest the cash proceeds into the top performers. The active way to play on performance cycles is to go long top performers and short top underperformers. This would need pairs, value hedging and beta classifications and of course understanding of leverage.

Regarding the overall market direction, we can look at time again. Markets go up when the time confirms and vice versa. Time fractal approach means that if we need a view for the 12 months and few weeks ahead, we need to see how time is placed few months and weeks. This is what we did. We plotted the time (days) between intermediate trends. The time indicator is an oscillator. A rising oscillator indicates a trend and a falling oscillator indicates counter trend. At this stage the intermediate time indicator is still rising suggesting there may be further upside. Any rally in Indian markets should not last beyond Q1 2010 (high of 2010). At this stage however, we see the market opening positive on 4 Jan and pushing higher. A net positive 2010 is a low probability scenario at this stage. India is in a multiyear trading range for us, something like the 1990’s US bear market which lasted for 4 years. Till the time we get clarity on the absolute performance, we will stick to the relative performance, get out of today’s top performers and get into today’s top underperformers.


Fractals India - CNXIT vs NIFTY

We talked about THE TECH REVERSAL as early as 14 Jan near 2000 levels. Prices jumped 184% from respective levels.

If we invert NIFTY, we have a similar ending formation like CNXIT early this year. This means sooner or later we are headed to 3,900 before anything.

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‘Performance cycles’ is a term coined by Orpheus Capitals. This is another name for time triads, time arbitrage, time fractals but expressed in terms of relative performance. It’s a bounded oscillator that moves from 1 to 30. 1 is top relative performance and 30 is worst performance. The idea is that performance is cyclical. A top performer will underperform in future and vice versa. A top relative performer is also the worst value pick and the top relative underperformer is the best value pick.

ORPHEUS INDIA RESEARCH

WAVES.IND is a perspective product published on Tuesday and Thursday. The report highlights Indian Stock Market top sectoral Indices and Sensex (BSE 30) viz. BSEOIL, BSESC (Small Cap), BSEMC (Mid Cap), BSEHC (BSE Health Care), BSEPHARMA (Pharmaceuticals), BSECG (Capital Goods), BSEBANK (Banking), CNXIT (Technology), BSEFMCG (FMCG), BSEAUTO (Auto) etc.. The product also covers all the 30 Sensex components. The product highlights Primary (Multi Month) and Intermediate (Multi Week) price trends. The report illustrates key price levels, price targets, price projections and time turn windows. The product uses Elliott waves, traditional technical analysis tools, sentiment indicators and other alternative research tools like INTERMARKET to spot outperformers.

COVERAGE: REUTERS RICS. INDICES. .BSEBANK, .BSEOIL, .NSEI, .BSECG, .BSESN, .BSEAUTO, .CNXIT, .NSEBANK, CITc1, IFc1, .NSEBANK

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Waves.forex - Japanese Yen leads Q1

The Japanese Yen hit a 12 month support and reversed. The reversal should last well into Q1 back up to 100. Apart from the preferred view which suggests a fast move up to 100 and potentially higher, we have also illustrated JPYEUR=. The corrective countertrend in JPYEUR= overlapping formation is clearer and confirms our preferred weak view on Yen.

The complex corrective started in Dec 2008 and could even last till Jun 2010. What does this mean for Forex watchers in 2010? It means that don’t be in a rush to look for dollar reversal. The extent of dollar strengthening may surprise.

Emerging market forex is a bit polarized and is showing down but bottoming structures on Indian rupee and Romanian Lei on one side and clear impulsive structures in Hungarian Forint and Croatian Kuna.

Danish Krone has bottomed. Other pairs like GBP USD and Canadian Dollar are still bottoming and completing corrective formations down, before they start trending again.

Enjoy the latest WAVES.FOREX

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WAVES.FOREX is a perspective product published TUE and THU. The report highlights the top traded FOREX PAIRS (e.g. Euro, Dollar, Yen, Indian Rupee, Romanian Lei, Swiss Franc and Dollar Index) The product highlights Primary (Multi Month) and Intermediate (Multi Week) price trends. The report illustrates key price levels, price targets, price projections and time turn windows. The product uses Elliott waves, traditional technical analysis tools and sentiment indicators. REUTER RICS: EURRON=, RON=, JPY=, INR=, HUF=, HRK=, GBP=, EURCHF=, CHFRON=, CAD=, =USD, EUR=

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The End of Behavioral Finance

end.of.behavioural.finance


The probability myth

Probability was not just about randomness, but about proportion.

Do you know how many times you use “Probably” in a day? The word refers to the possibility of a certain event happening. Irrespective of our ability to calculate probability, we frequently estimate, compare and make decisions based on probability. It is a subjective degree of belief in the occurrence of an event. The concept of probability has philosophical, psychological and scientific interpretations. Putting simply, probability of an event is the ratio between the number of favorable events and the number of all equally possible cases.
Evolution of probability theory
Initially probability theory was inspired by games of chance in the 17th century. However its complete axiomatisation had to wait until Kolmogorov’s ‘Foundations of the Theory of Probability’ in 1933. Over time, probability theory found several models in nature and became a branch of mathematics with a growing number of applications. In physics probability theory became an important tool in Thermodynamics and Quantum Physics.
Probability is the reason why a vast majority of phenomena from nature and society are considered stochastic (random). Their study cannot be deterministic. Probability theory deals with the laws of evolution of random phenomena. Rolling a die, tossing a coin pushed us to focus on prediction taking us away from the initial relative ratio proportion of probability. The distraction towards random elements was owing to the details like the initial impulse of the die, the die’s position at the start, characteristics of the surface on which the die is rolled, and so on. A drunkard reaching home, the time it takes him to travel a fixed distance varies because of random elements (traffic, meteorological conditions, amount of alcohol, etc). These were the details which forced us to assume that the essential conditions of each experiment are unchanged (“ceteris paribus”).
This focus on prediction and cause and effect took us to develop experiments and its results and focus on developing methods to study random phenomena. This was despite the fact that an equal aspect of probability is about relative frequency. How many times you may repeat an experiment in identical conditions, the relative frequency of a certain result (the ratio between number of experiments having one particular result and total number of experiments) is about the same.
Event focus, evolution of phenomenon, quantity focus and conditions focus complicated this further. Probability is not the expression of the subjective level of man’s trust in the occurrence of the event, but the objective characterization of the relationship between conditions and events or between cause and effect. The probability of an event makes sense as long as the set of conditions is left unchanged. Any change in these conditions changes the probability and consequently the statistical laws governing the phenomenon. So, if the initial conditions can never stay constant, can science ever find a solution?
This is why the notion of a butterfly ruling our life seems valid and this is the same reason why the idea of long term predictions is considered impossible. Will our life remain random? And will we ever come out of this quandary that even though systems are deterministic, meaning that their future dynamics are fully determined by their initial conditions, with no random elements involved, they are still chaotic? Isn’t it strange living this deterministic chaos?
We want to believe life is random, though the same random theories talk about relative proportion and patterns. We want to develop theories of randomness, though we have scientific history of predictability and order in physics. The drunkard’s behavior has an order, but we don’t consider it one. Human beings have problems with extremes. If there is an extreme mankind can’t explain, we get into thoughts of disorder, unpredictability, lack of equilibrium and inefficiency. The very fact that market crisis is a case of inefficiency for us, while earthquakes are natural predictable disasters, also shows our double standards in our treatment of extremes. We built economics around normalcy and when Mandelbrot proved that extremes were normal, our whole world of order seems to have collapsed.
Are we addressing extremes?
What are we doing now to address it? We are creating new subjects, econophysics, econoscience, econobiology and behavioral finance address the extremes. Though we have done a good job illustrating extremes in economics (far away from normalcy), we are still struggling with explaining the order in this chaos. We can’t seem to know why there is an order in these extremes, why do they repeat. Just because we can’t seem to explain the timing of the extreme, we say everything is random. Because if we would call it ordered, we would be expected to know the recurrence of the next extreme.
The Time decay
Showcasing an order in time would prove that there are no butterflies causing Armageddon. It would also prove that randomness is not owing to initial conditions, but because there is a limit to which one can understand and model time. Last time we illustrated cases on global assets and how time decayed in a similar form. This time we have picked up some random events like the chronology of Indian history starting Indus valley civilization from 3000 BC to the latest political elections, the chronology of battles starting ‘The Marathon battle’ in 490 BC till ‘The Battle of Dien Bien Phu’ in 1954, the chronology of US Naval history starting the commissioning of building six frigates on 27 March 1794 till the recent 200 year anniversary in 1997 and the chronology of Roman Empires starting Augustus in 27 BC to Romulus Augustus in 475 AD. Guess what? The so called random events in time decayed proportionally.
Now what is the probability that time decay in four random events in history decay in a similar exponential way? And what is the chance that this time decay in historical events is similar to the time decay in global assets like Gold, Oil, Dow, Sensex, BET, etc.? Well, for us, at Orpheus, the probability is 100 per cent, as we are not speaking about a chance decay, we are speaking about a pattern of time. Bloggers like Paul Kedrosky from ‘Infectious Greed’ talk about the end of behavioral finance illustrating how Richard Thaler’s fund underperformed. This is an old post, but the very fact that practical utility of the behavioral models is challenged on the web, suggests that there is more work to be done.  Apart from the behavioral models, what really surprises us, is how the world bought into the story of butterflies in Brazil setting off tornados in Texas?
Time is too bland to become a hot selling story. But it is indeed shocking how, helpless human beings, are pitched to be unaware of the black swan. Randomness gives humans a feeling that they are lost in a labyrinth. But, if the man is indeed in a labyrinth, a constant failure to search for a route will force him to see failure patterns and, sooner or later, he will find a way out of the maze. Even if humans are greedy and fearful, they are not dumb with a blank page in their head, ready to drift with the wind where it takes them. The wind has a direction in its drift. Nothing propagates in life if it is random, nature cannot be random, propagation, growth is ordered, because the time we live in has proportion, pattern and decay.

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Waves.Forex - EURUSD downtrend continues.

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WAVES.FOREX is a perspective product published TUE and THU. The report highlights the top traded FOREX PAIRS (e.g. Euro, Dollar, Yen, Indian Rupee, Romanian Lei, Swiss Franc and Dollar Index) The product highlights Primary (Multi Month) and Intermediate (Multi Week) price trends. The report illustrates key price levels, price targets, price projections and time turn windows. The product uses Elliott waves, traditional technical analysis tools and sentiment indicators. REUTER RICS: EURRON=, RON=, JPY=, INR=, HUF=, HRK=, GBP=, EURCHF=, CHFRON=, CAD=, =USD, EUR=

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BETFI. Above 24,000 we continue to look higher

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WAVES.ROM is a perspective product published on TUESDAY’S and THURSDAY’S. The report highlights Romanian Stock Market top three Equity Indices viz. the top ten blue chip BET Index (.BETI), BET Composite (.BETC), the Financial Index BETFI (.BETFI) and the local currency RON (EURRON=, RON=). The products covers the top ten BET component stocks. (ROMP.BX, SNPP.BX, BATR.BX, BRDX.BX, TSEL.BX, ATBE.BX, BRKU.BX, BIOF.BX, IMPT.BX, TUBU.BX) and all the components of BETFI Financial Index(SIF2.BX, SIF5.BX, SIF3.BX, SIF1.BX, SIF4.BX) are covered in the report. The product highlights Primary (Multi Month) and Intermediate (Multi Week) price trends. The report illustrates key price levels, price targets, price projections and time turn windows. The product uses Elliott waves, traditional technical analysis tools, sentiment indicators and other alternative research tools like INTERMARKET to spot outperformers. WAVES.ROM, CHANNELS.BVB and CHANNELS.RASDAQ are bundled together as PERSPECTIVE products. Unlike WAVES which focuses more on blue chips, CHANNELS covers all the BVB and RASDAQ stocks.

REUTERS COVERAGE .BETFI, TUBU.BX, TSEL.BX, SNPP.BX, SIF5.BX, SIF4.BX, SIF3.BX, SIF2.BX, SIF1.BX, ROMP.BX, IMPT.BX, BRKU.BX, BRDX.BX, BIOF.BX, BATR.BX, ATBE.BX

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The Time Decay

The exponential decay of time proves that all the focus on studying news, information, prices, psychology and mathematical order are indirect ways to study time.

Growth and decay has always been associated with nature, assets, life but rarely with time. From Apr 08 - Mar 09 we have been publishing ideas linked with time cyclicality and fractals and starting Mar 09 we have expanded the idea of time coining ideas like time triads, time fractals, time arbitrage and performance cycles. We have illustrated long short pair trading cases between India - China, Czech - Poland, BSEOIL vs. Sensex, Gold vs. Oil, Nikkei vs. India, Soya vs. Shanghai and many other single asset ideas.

We talked about the work of a few Nobel Prize winners, work of various experts, authors and thinkers over the last 250 years (and more). Euclid, Leonardo Fibonacci, Adam Smith, Thomas Malthus, Maynard Keynes, Vilfredo Pareto, Pierre Francois Verhulst, Karl Marx, Charles Dow, Karl Lamprecht, J M Draper, George Cantor, Ralph N. Elliott, Kinglsey Zipf, Joseph Kitchin, Clement Juglar, Brian Berry, Daniel Kahneman, Benoit Mandelbrot, Robert Shiller, Hersh Shefrin, Martin Pring, John Murphy, Theodore Modis, Bill Meridian, William Strauss and Neil Howe, Tony Plummer, Eugene Stanley, Robert Prechter etc. We covered a lot of market research literature to illustrate a few simple ideas. First: Time cyclicality was a reality. Second: Over a few hundred years, research (mathematical, historical, scientific, market related, psychological) overlapped. Third: Time was the pulse or the soul of everything.

The third idea is and will be contested as it simplifies many life times of work. It challenges Mandelbrot’s Chaos theory assumption and fractalness of nature. Time and price can’t be fractalled at the same time so it consequently proves that Elliott wave theory of price is actually a theory of time. The idea of time fractal also moots that efficient and inefficient market theories (behavioral and others) are two faces of the same coin, the real risk comes from time translation and Pareto principle is because of time triads.

To demonstrate my case, I shall take global assets, isolate time periodicities and illustrate time decay. If time decays similarly across respective assets over various periods of studies then there is indeed something about ‘Time’ that can’t be ignored. I took the following assets, Gold, Dow, Oil, Indian Sensex, Indian CNXIT futures (technology Index Futures), Japanese Nikkei, Romanian Blue chip BET and Euro Dollar currency pair. I took all the available history from my Thomson Reuters 3000 Xtra terminal. Some data periods were from 1955, a few from 1965 and majority from 1990′s.

What did I do with this data? I detrended the price. I was left with an oscillator on an x-axis with calendar dates. These calendar dates were nothing but time cycles with time periodicities in days, weeks, months, hours etc. I sorted the time periodicities on a descending basis in number of days and plotted them. I got the following charts (illustration). All the charts not only looked similar but decayed in an exponential way. Students of Pareto principle, mathematics, econophysics and Mandelbrot fractals will say “so what is surprising here? This is a clear expression of power law.” Look again at the charts, there is no price in the charts. It’s just time decay. Above that the similarity of the charts are irrespective of the asset and the period of study.

What does this mean? This means that time grows and decays exponentially and because of which asset prices seem to grow and decay exponentially in a power law basis. It also means that either time is exponential or price is. Both can’t grow and decay at the same time exponentially. This also proves that all the focus on studying news, information, prices, psychology, sentiment and mathematical order are indirectly ways to study time.

If you look at the charts and cases further you will see that most assets when plotted on a daily basis had an average periodicity of 15-20 days, when plotted on a weekly basis had an average periodicity of 66-77 days, when plotted on a monthly basis had an average periodicity near 400 days. Now that it all looks coincidental, I plotted the data of all the days from 23 Apr 1997 since I first wrote in Business Standard. Guess what? Over the respective publishing period of near 13 years, the time difference between my features also decayed exponentially.

In conclusion, the power law 80-20 rule that has been omnipresent in nature, markets, and societies turns out to be also present in time. This aspect proves that time is not a linear moribund constant but a living pulsating variable which gives life to everything else. If global traded assets and a time series of a decade long personal event create similar patterns, we cannot keep living the illusion that time has no pattern and mathematics. The idea of randomness falls on its face, when mathematics and order gets associated with time. Time fractals are the reason why opportunities – crisis, war – peace, creation - destruction will recur irrespective of any human effort. The exponential growth and decay of time suggest that we have a lot of unlearning to do. And before we do that, we should give time cyclists there due place in history of research, atleast at par with psychologists, technicians, historians and mathematicians.

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Econophysics




Econophysics and economic complexity


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