Archive for the ‘Aggregate’ category

Long only, Short only signals updated.

Canadian Dollar and Heating oil give fresh open long signals. Sugar and Tin best longs with above 40% gains. Swedish Bond Index signals close.


ALPHA is a pair trading, long only - short only strategy and Numeric Ranking product based on TIME fractals. Time arbitrage, Time Triads, Time fractals are terms coined by Orpheus Research. The signals are carried over three different time frames viz. sub minor (2-3 days), minor (10-30 days) and intermediate (above 30 days). This is a daily signal product. The signals will be illustrated through tracker and running portfolios. Alpha can be used by fund managers for relative allocations, traders for leverage bets and high net worth clients for selective trades. This is a part of the time triads analytics developed by Orpheus Research.

Coverage: Forex (EUR USD, AUD USD, GBP USD, CAD USD, JPY USD, CHF USD, Yuan Rnmbi, Indian rupee, NZD USD), Energy (Crude, Natural Gas, Gasoline, Heating Oil, Petroleum, Carbon Emissions, Brent, WTM, Energy Index), Metals (Precious Metals, Tin, Zinc, Nickel, Copper, Platinum, Silver, Industrial Metals Index, Gold), Agro (Coffee, Corn, Grains, Livestock, Sugar, Wheat, Soybeans, Cotton), Thematic and Global Equity (Coal Mining Fund, Shipping Fund, Dow Industrials, Sense, Agricultural Equity, Water, Nuclear, Russell 2000, Russell 1000 USD), Bonds (US 30, US 5Y,  US 10Y, US 2Y, INR Bond Index, China Bond Index, Australian Bond Fund, Global Bond Index, Sweden Bond Index).

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 in a range say 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.

*This is a strategy product. Long Short strategies are not riskless strategies. Please mail us for a detailed working or consult a local financial risk manager to execute these pairs. For more details please subscribe to the ORPHEUS TIME ANALYTICS research products.

Time is a social construct and we see time through the life and nature around us. Understanding time can not only give a unifying theory to research of a few thousand years, but also help us understand the world we live in. Time evolves, oscillates and continues. Time comes before everything, but we don’t see it. We just feel it. We believe what we see and this is why understanding what we don’t see is a challenge. Understanding time could bring more than a conventional thought down, it’s a revolution, which could rock the very foundation of economic thought or the geometric structures Euclid laid down in 300 BC. We are at the start of the journey, but if time is indeed the real mathematics, we could see high accuracy in time forecasts.

Econohistory is the study of performance cycles between assets. Cycles are the generic name for time fractals. Performance cycles can be studied for any time frame, for as small as a tick data to multiyear time frames. This objective approach to performance cyclicality can explain why intermarket analysis is an area of study? Why bonds and commodities tend to be inversely related? What is the connection of Oil with world markets? Why the world watches DOW sometimes and sometimes a 500 point effect on DOW seems to have no impact? Why correlation between assets moves from near perfect at times to weak correlation at other times? Why the same news has different impact on a stock or market? Why equities and bond trend together and why the relationship decouples sometime? When will inflation become deflation, disinflation, stagflation or hyperinflation? When and why does gold outperform and underperform silver? Econohistory can objectively answer these questions, using performance cycles, time fractals and past data. Economic history is mathematical.

To login to the member’s area or access Orpheus estore click here.

Orpheus Research at Reuters - United Kingdom

Orpheus Research at Reuters - United States


Global rankings suggests short agro, long energy


ALPHA is a pair trading, long only - short only strategy and Numeric Ranking product based on TIME fractals. Time arbitrage, Time Triads, Time fractals are terms coined by Orpheus Research. The signals are carried over three different time frames viz. sub minor (2-3 days), minor (10-30 days) and intermediate (above 30 days). This is a daily signal product. The signals will be illustrated through tracker and running portfolios. Alpha can be used by fund managers for relative allocations, traders for leverage bets and high net worth clients for selective trades. This is a part of the time triads analytics developed by Orpheus Research.

Coverage: Forex (EUR USD, AUD USD, GBP USD, CAD USD, JPY USD, CHF USD, Yuan Rnmbi, Indian rupee, NZD USD), Energy (Crude, Natural Gas, Gasoline, Heating Oil, Petroleum, Carbon Emissions, Brent, WTM, Energy Index), Metals (Precious Metals, Tin, Zinc, Nickel, Copper, Platinum, Silver, Industrial Metals Index, Gold), Agro (Coffee, Corn, Grains, Livestock, Sugar, Wheat, Soybeans, Cotton), Thematic and Global Equity (Coal Mining Fund, Shipping Fund, Dow Industrials, Sense, Agricultural Equity, Water, Nuclear, Russell 2000, Russell 1000 USD), Bonds (US 30, US 5Y,  US 10Y, US 2Y, INR Bond Index, China Bond Index, Australian Bond Fund, Global Bond Index, Sweden Bond Index).

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 in a range say 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.

*This is a strategy product. Long Short strategies are not riskless strategies. Please mail us for a detailed working or consult a local financial risk manager to execute these pairs. For more details please subscribe to the ORPHEUS TIME ANALYTICS research products.

Time is a social construct and we see time through the life and nature around us. Understanding time can not only give a unifying theory to research of a few thousand years, but also help us understand the world we live in. Time evolves, oscillates and continues. Time comes before everything, but we don’t see it. We just feel it. We believe what we see and this is why understanding what we don’t see is a challenge. Understanding time could bring more than a conventional thought down, it’s a revolution, which could rock the very foundation of economic thought or the geometric structures Euclid laid down in 300 BC. We are at the start of the journey, but if time is indeed the real mathematics, we could see high accuracy in time forecasts.

Econohistory is the study of performance cycles between assets. Cycles are the generic name for time fractals. Performance cycles can be studied for any time frame, for as small as a tick data to multiyear time frames. This objective approach to performance cyclicality can explain why intermarket analysis is an area of study? Why bonds and commodities tend to be inversely related? What is the connection of Oil with world markets? Why the world watches DOW sometimes and sometimes a 500 point effect on DOW seems to have no impact? Why correlation between assets moves from near perfect at times to weak correlation at other times? Why the same news has different impact on a stock or market? Why equities and bond trend together and why the relationship decouples sometime? When will inflation become deflation, disinflation, stagflation or hyperinflation? When and why does gold outperform and underperform silver? Econohistory can objectively answer these questions, using performance cycles, time fractals and past data. Economic history is mathematical.

To login to the member’s area or access Orpheus estore click here.

Orpheus Research at Reuters - United Kingdom

Orpheus Research at Reuters - United States


The skyrocket crackle

First it was Armajaro buying 7% of cocoa market, then it was Bloomberg news about rallying Sugar as ships clogged Brazil ports and then we had wheat surge backed by worst 100 year drought.

We at Orpheus are looking at Inflationary era ahead and disagree with the idea that low interest rate era is here to stay. Inflationary times are about rising Agro prices. But as an investor or money manager you are concerned about a month, a quarter or a year or maybe few years. If you have deep pockets like Anthony Ward, we agree agro is a good bet to hold. But if you concerned about how your portfolio looks end of Q3, you really can’t trade on such news. The world is coming to an end since 1999 and there are people still waiting for more than a decade for it to all end. You have a choice to really go spiritual and stop worrying about markets, but if you are in the markets you can’t really trade on news that does not come with an expiration or validity on them.

Coffee, Sugar, Wheat are the top ranking assets in the Alpha Global. Price extremes attract attention and hence are widely cited. It is tough to find three buy stories on Gold in 1999-2000. Now we don’t even have to count ‘buy gold’ stories from 2008 till date. The world gold council CEO Aram Shishmanian was interviewed by economist. He talked about supply and demand of gold and how gold remained positive. Aram how much patience are you expecting from the gold bulls? The precious metal delivered 20% in 30 months. We talked about ‘Fools gold’ and ‘The gold short’ while remaining in minority. News accountability was always low and supply demand is tough to quantify with time.  If you don’t want to keep holding something uncomfortably for a long time, you should better look at news with a pinch of numeric ranking reality.

The coffee excitement did not pan out as expected. As anticipated the worst performer (no news generator) Zinc outperformed Coffee (the news generator). The Coffee-Zinc Rieki continues to point to a multi week Zinc outperformance against Coffee. Our long Euro - short dollar pair delivered 16% against dollar (the news generator).

To read more on Dow ranking, new running pairs, Gold vs, Oil, Sensex vs. Dow, Energy Rieki, Agro Reiki, Best buys, Best sells, outlook for Q3, broad market view and volatility perspective download the report from the Orpheus Store, Reuters Knowledge links below or mail us for subscription to Alpha Global.

The latest Alpha Global carries the running trackers, performance cycles for asset groups, top 54 global assets and strategy updates. Enjoy the report and remember that skyrocket crackle comes at end of the show, not in the beginning.

Alpha Pair Tracker

Numeric Ranking

Strategy Update

Asset Cycles

Performance Cycles I

Performance Cycles II

ALPHA is a pair trading, long only - short only strategy and Numeric Ranking product based on TIME fractals. Time arbitrage, Time Triads, Time fractals are terms coined by Orpheus Research. The signals are carried over three different time frames viz. sub minor (2-3 days), minor (10-30 days) and intermediate (above 30 days). This is a daily signal product. The signals will be illustrated through tracker and running portfolios. Alpha can be used by fund managers for relative allocations, traders for leverage bets and high net worth clients for selective trades. This is a part of the time triads analytics developed by Orpheus Research.

Coverage: Forex (EUR USD, AUD USD, GBP USD, CAD USD, JPY USD, CHF USD, Yuan Rnmbi, Indian rupee, NZD USD), Energy (Crude, Natural Gas, Gasoline, Heating Oil, Petroleum, Carbon Emissions, Brent, WTM, Energy Index), Metals (Precious Metals, Tin, Zinc, Nickel, Copper, Platinum, Silver, Industrial Metals Index, Gold), Agro (Coffee, Corn, Grains, Livestock, Sugar, Wheat, Soybeans, Cotton), Thematic and Global Equity (Coal Mining Fund, Shipping Fund, Dow Industrials, Sense, Agricultural Equity, Water, Nuclear, Russell 2000, Russell 1000 USD), Bonds (US 30, US 5Y,  US 10Y, US 2Y, INR Bond Index, China Bond Index, Australian Bond Fund, Global Bond Index, Sweden Bond Index).

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 in a range say 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.

*This is a strategy product. Long Short strategies are not riskless strategies. Please mail us for a detailed working or consult a local financial risk manager to execute these pairs. For more details please subscribe to the ORPHEUS TIME ANALYTICS research products.

Time is a social construct and we see time through the life and nature around us. Understanding time can not only give a unifying theory to research of a few thousand years, but also help us understand the world we live in. Time evolves, oscillates and continues. Time comes before everything, but we don’t see it. We just feel it. We believe what we see and this is why understanding what we don’t see is a challenge. Understanding time could bring more than a conventional thought down, it’s a revolution, which could rock the very foundation of economic thought or the geometric structures Euclid laid down in 300 BC. We are at the start of the journey, but if time is indeed the real mathematics, we could see high accuracy in time forecasts.

Econohistory is the study of performance cycles between assets. Cycles are the generic name for time fractals. Performance cycles can be studied for any time frame, for as small as a tick data to multiyear time frames. This objective approach to performance cyclicality can explain why intermarket analysis is an area of study? Why bonds and commodities tend to be inversely related? What is the connection of Oil with world markets? Why the world watches DOW sometimes and sometimes a 500 point effect on DOW seems to have no impact? Why correlation between assets moves from near perfect at times to weak correlation at other times? Why the same news has different impact on a stock or market? Why equities and bond trend together and why the relationship decouples sometime? When will inflation become deflation, disinflation, stagflation or hyperinflation? When and why does gold outperform and underperform silver? Econohistory can objectively answer these questions, using performance cycles, time fractals and past data. Economic history is mathematical.

To login to the member’s area or access Orpheus estore click here.

Orpheus Research at Reuters - United Kingdom

Orpheus Research at Reuters - United States


Long zinc, short coffee delivers 9% (7 days)

Despite starting counterparty odds, long zinc -  short coffee was up 9% and long AIGI (industrial metals) - short gold was up 14%. This week we are doing another pair rollover. We are closing the short heating oil leg and plugging the long AIGE (Energy Index) leg with Natural Gas. The Natgas Rieki is turning against dollar and also against Brent and AIGE. Our global asset rankings are benchmarked to dollar, so as natural gas moves up to top three, we don’t want to hold it as a naked asset anymore.

Alpha Pair Tracker


The other running pairs like short carbon emissions ETF and Crude, Short Carbon Emission and AIGI (industrial metals) delivered 1.6% and 8% since 15 July respectively. Long Euro – Short dollar is up 16% and still running. GBP USD and JPY gave first signals of exhaustion against dollar.

During an internal brainstorming session, the question which emerged was “Why should be just look at extreme divergence to short the best and long the worst?” and “Why can’t we say keeps the low divergence pair running, say between wheat and grains (No. 4 and 10)?”

The whole idea of playing extreme divergence is about accepting that one can try understanding that assets have diverged more than normal and the path of least resistance is to low or neutral divergence when for example coffee and zinc reduce the gap from worst and best to somewhere mid way. Working with low divergence pairs or non extreme pairs is like guessing how a backwardation will resolve, very tough.

On a final note, our top ranking coffee was number 2 this week. Sugar assumed the top ranking spot. What a better time to talk about sugar but now. Sugar was in the news and the majority is made to believe that there is no asset better than sugar today. For us at Orpheus, Sugar should not only underperform dollar, but also more than a few global assets over the next few weeks. The latest Alpha carries the pair tracker with updated signals and global asset rankings.

Numeric Ranking

Strategy Update

Sector Cycles

Performance Cycles I

Performance Cycles II

ALPHA is a pair trading, long only - short only strategy and Numeric Ranking product based on TIME fractals. Time arbitrage, Time Triads, Time fractals are terms coined by Orpheus Research. The signals are carried over three different time frames viz. sub minor (2-3 days), minor (10-30 days) and intermediate (above 30 days). This is a daily signal product. The signals will be illustrated through tracker and running portfolios. Alpha can be used by fund managers for relative allocations, traders for leverage bets and high net worth clients for selective trades. This is a part of the time triads analytics developed by Orpheus Research.

Coverage: Forex (EUR USD, AUD USD, GBP USD, CAD USD, JPY USD, CHF USD, Yuan Rnmbi, Indian rupee, NZD USD), Energy (Crude, Natural Gas, Gasoline, Heating Oil, Petroleum, Carbon Emissions, Brent, WTM, Energy Index), Metals (Precious Metals, Tin, Zinc, Nickel, Copper, Platinum, Silver, Industrial Metals Index, Gold), Agro (Coffee, Corn, Grains, Livestock, Sugar, Wheat, Soybeans, Cotton), Thematic and Global Equity (Coal Mining Fund, Shipping Fund, Dow Industrials, Sense, Agricultural Equity, Water, Nuclear, Russell 2000, Russell 1000 USD), Bonds (US 30, US 5Y,  US 10Y, US 2Y, INR Bond Index, China Bond Index, Australian Bond Fund, Global Bond Index, Sweden Bond Index).

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 in a range say 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.

*This is a strategy product. Long Short strategies are not riskless strategies. Please mail us for a detailed working or consult a local financial risk manager to execute these pairs. For more details please subscribe to the ORPHEUS TIME ANALYTICS research products.

Time is a social construct and we see time through the life and nature around us. Understanding time can not only give a unifying theory to research of a few thousand years, but also help us understand the world we live in. Time evolves, oscillates and continues. Time comes before everything, but we don’t see it. We just feel it. We believe what we see and this is why understanding what we don’t see is a challenge. Understanding time could bring more than a conventional thought down, it’s a revolution, which could rock the very foundation of economic thought or the geometric structures Euclid laid down in 300 BC. We are at the start of the journey, but if time is indeed the real mathematics, we could see high accuracy in time forecasts.

Econohistory is the study of performance cycles between assets. Cycles are the generic name for time fractals. Performance cycles can be studied for any time frame, for as small as a tick data to multiyear time frames. This objective approach to performance cyclicality can explain why intermarket analysis is an area of study? Why bonds and commodities tend to be inversely related? What is the connection of Oil with world markets? Why the world watches DOW sometimes and sometimes a 500 point effect on DOW seems to have no impact? Why correlation between assets moves from near perfect at times to weak correlation at other times? Why the same news has different impact on a stock or market? Why equities and bond trend together and why the relationship decouples sometime? When will inflation become deflation, disinflation, stagflation or hyperinflation? When and why does gold outperform and underperform silver? Econohistory can objectively answer these questions, using performance cycles, time fractals and past data. Economic history is mathematical.

To login to the member’s area or access Orpheus estore click here.

Orpheus Research at Reuters - United Kingdom

Orpheus Research at Reuters - United States


Introducing Alpha global pair portfolio tracker

The Alpha global portfolio tracker will be posted in the member’s area on a daily basis. The portfolio covers Agro, Forex, Metals and Energy pairs. For more information on Alpha global pair portfolio tracker mail us at [email protected]

ALPHA is a pair trading, long only - short only strategy and Numeric Ranking product based on TIME fractals. Time arbitrage, Time Triads, Time fractals are terms coined by Orpheus Research. The signals are carried over three different time frames viz. sub minor (2-3 days), minor (10-30 days) and intermediate (above 30 days). This is a daily signal product. The signals will be illustrated through tracker and running portfolios. Alpha can be used by fund managers for relative allocations, traders for leverage bets and high net worth clients for selective trades. This is a part of the time triads analytics developed by Orpheus Research.

Coverage: Agro, Forex, Metals, Energy

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 in a range say 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.

*This is a strategy product. Long Short strategies are not riskless strategies. Please mail us for a detailed working or consult a local financial risk manager to execute these pairs. For more details please subscribe to the ORPHEUS TIME ANALYTICS research products.

Time is a social construct and we see time through the life and nature around us. Understanding time can not only give a unifying theory to research of a few thousand years, but also help us understand the world we live in. Time evolves, oscillates and continues. Time comes before everything, but we don’t see it. We just feel it. We believe what we see and this is why understanding what we don’t see is a challenge. Understanding time could bring more than a conventional thought down, it’s a revolution, which could rock the very foundation of economic thought or the geometric structures Euclid laid down in 300 BC. We are at the start of the journey, but if time is indeed the real mathematics, we could see high accuracy in time forecasts.

Econohistory is the study of performance cycles between assets. Cycles are the generic name for time fractals. Performance cycles can be studied for any time frame, for as small as a tick data to multiyear time frames. This objective approach to performance cyclicality can explain why intermarket analysis is an area of study? Why bonds and commodities tend to be inversely related? What is the connection of Oil with world markets? Why the world watches DOW sometimes and sometimes a 500 point effect on DOW seems to have no impact? Why correlation between assets moves from near perfect at times to weak correlation at other times? Why the same news has different impact on a stock or market? Why equities and bond trend together and why the relationship decouples sometime? When will inflation become deflation, disinflation, stagflation or hyperinflation? When and why does gold outperform and underperform silver? Econohistory can objectively answer these questions, using performance cycles, time fractals and past data. Economic history is mathematical.

To login to the member’s area or access Orpheus estore click here.

ORPHEUS RESEARCH AT REUTERS - UNITED KINGDOM

ORPHEUS RESEARCH AT REUTERS - USA


THE TIME ARBITRAGE

I remember meeting Ajay Shah, Professor and Columnist in 2000, during my early days as a derivatives analyst in Mumbai. He talked about how speculators-arbitrageurs and hedgers together create the magic in derivatives market. It was indeed magical as from its humble beginnings when nobody believed in the potential of markets and badla was still considered the real thing, we came a long way. Little did then we realize that in less than 10 years we would be illustrating the gaps in the hedge ratio and our understanding of hedging and arbitrage activity. Hedge was the basic premise for establishing the derivatives markets in India. The L C Gupta committee report delved on this in detail illustrating it in the evolution and economic purpose of derivatives.

Readers who would have read our half yearly outlook on India (28 July) would have seen how illusionary the hedging process is. If between 24 sector pair trades one could create 32% annualized returns with the maximum ruling at 173% (Sensex - Real) and only six out of 24 pairs delivering less than 5% annualized returns, there was something about hedging or pair returns we do not know. One might also say, “what about BETA?” (the sensitivity quotient between assets). We are comparing sector indices here and if you think beta argument can really disprove these results, it is a tough task. We can demonstrate not only returns between highly correlated and similar beta assets but also between an asset and its own stock future (Long Nifty - Short Nifty Futures). The best part is that it’s all very simple.

So what happened? Did the hedge ratio fail? How could a conventional risk management idea make money or for that matter lose it? If you were long Sensex and short BSE Real, you would have lost 173% annualized. The idea is not just about lack of trading instruments. India doesn’t have well traded sector futures and options, as market participants focus more on stock futures than understanding or trading sectoral exposures.

Are we correct in saying that Hedge funds did everything but hedging that’s why they went under? Did we ever think that there could be gaps in the hedging theory and that’s why what was not supposed to sink, drowned? The idea that in the long term it works could also be an illusion, as there are costs involved and hedging as an activity is more about minimizing losses rather than eliminating them. The very reason there are not very many companies offering hedging solution. Did Hedging outfits suffered because the cost of hedging was exorbitant?

The arbitrage philosophy

Understanding hedging has a lot to do with how we comprehend the hedge process. Arbitrage pricing theory (APT) is a general theory of asset pricing that has become influential in the pricing of stocks. APT holds that the expected return of a financial asset can be modeled using the sensitivity factor aka beta coefficient. The derived rate of return will then be used to price the asset. If the price diverges, arbitrage should bring it back into line. Arbitrage is the practice of taking advantage of a state of imbalance between two or more markets and thereby making a risk-free profit. The theory was initiated by the economist Stephen Ross in 1976.

This back into line philosophy is at the heart of the hedge failure. This could also be the reason why we as a society are running farther from understanding risk than getting closer to comprehending it.

History of statistical arbitrage

How far we are from understanding cyclicality, time and fractals and how poorly we implement them in our strategies can also be understood by studying the history of statistical arbitrage. Statistical arbitrage aka stat. arb was started in 1985, a decade after the APT.  Reversion to mean was born. In his recent book Statistic Arbitrage, Andrew Pole comprehensively delves into stat arb. Pair trading was a simple idea of trading similar historical prices. The strategy was based on reversion, which occurs everywhere and anywhere. This was a sign of fractalled nature, but the author barely mentions the term (three times) in his 257 page work.

Despite the lack of fractal details, the normal distribution in prices needed for reversion in prices is dismissed as an erroneous claim. Fractal watchers do the same as heavy tails and power law are the mathematical explanation for fractals.  The author spends a few chapters of the book explaining why stat. arb. was beset with problems starting from 2000 and how the strategy exhibited a diminished economic potential. He cites ideas like more advanced algorithms, volatility, vagueness of practitioners, and lack of knowledge on part of the investors.

The author asks a lot of relevant questions like how does one identify when a price is away from the mean and how much? How long will the return to mean take? Are heavy tails the reason for frequent miscalculation and underestimation of risk? Why simple probability theorems cannot guarantee reversion which is challenged by heavy tails? Why we must always learn from the predictable occurrences, however odd they may look at first sight? Why we should be buying in weakness and sell in strength?  Why patterns of stock prices are occurring at least two higher frequencies above in time scales? Why LTCM failure could have been linked to higher time frequency patterns? Why Gauss is not the God of reversion?

But the book fails to admit time cyclicality and builds its case mostly through reversion. Somewhere simplistic thinking takes over simple thinking. Like how to judge whether a spread tomorrow will be greater or smaller. If it’s greater than the mean today it will be smaller tomorrow. Pole also looks at reversion to mean as more magical than the fractalled nature of markets. Though he mentions that mean reversion involves temporal dynamics and time frequency analysis, temporal aspects are the source of profits, trades at a point of time are the means with which the opportunity is exploited, but there is not even one mention of time cyclicality in the book. It’s not the first time that we have missed the idea.

Missing the idea

The idea dismissed by Pole that simple probability theorems cannot guarantee reversion are strangely the same ideas explored by other reversionists. Larry Connors of Trading markets searches for statistical probabilities that help traders profit when stocks revert to the mean. “The further prices stretch away from the mean on a short term basis, the sharper they snapback”, Connors was quoted in Bloomberg Markets. Connors and Ceaser Alvarez, are ex Microsoft engineers who worked on the development team of excel program. They seek to identify tradable price patterns based on statistical probabilities. The duo works with a large database of 8.5 million trades.

Robert Shiller’s MacroMarkets’ is also not free of mean reversion. In his 1993 book, MacroMarkets: Creating Institutions for managing society’s Largest Economic Risks, the author talks about unmanaged risk and the need for a risk management solution. To hedge Oil risk MacroMarkets introduced a new way to include Oil in a portfolio. Dubbed Macroshare $ 100 Oil UP and Macroshare $ 100 Oil DOWN exchange traded securities issued by paired trusts. According to a Bloomberg market report, “the trusts have an income distribution agreement under which assets flow from one to another in proportion to the level of the benchmark”.

As OIL moves above or below 100, the funds flow from one bucket to the other. This is supposed to be a hedging mechanism to help people. Whether we call it an innovative solution, this is still a pair attempt at managing risk. Pair trading based on reversions are far from perfect and prone to failure. The idea about comprehending markets is tougher than the idea of comprehending market cyclicality. This is why teaching market participant’s cyclicality by creating more pair offers is just adding to the already oversaturated market. The market is already trying to take a detoxifying pause from structured products.

The behavioral finance idea of losers vs. winner’s index has more merit because it illustrates cyclicality. The only unfortunate part is that behaviorologists don’t admit that the idea of selling winners and buying losers is the central idea of performance cycles.

Conclusion

A hedge is not only imperfect but inefficient and costly. Statistical arbitrage is a euphemism for Time arbitrage, performance cycles and till the time we don’t focus attention on TIME our attempt to understand risk will fail. We will have someone or something to blame then. According to Paul Samuelson, “Financial engineering is like science that can help mankind or create atomic bombs”. We will worship Beta and then pronounce it dead, rechristen it later as Jenson Beta, but there is one thing we will intuitively avoid, cycles of time.

I remember meeting Ajay Shah in 2000, during my early days as a derivatives analyst in Mumbai. He talked about how speculators-arbitrageurs and hedgers together create the magic in derivatives market. It was indeed magical as from its humble beginnings when nobody believed in the potential of markets and badla was still considered the real thing, we came a long way. Little did then we realize that in less than 10 years we would be illustrating the gaps in the hedge ratio and our understanding of hedging and arbitrage activity. Hedge was the basic premise for establishing the derivatives markets in India. The L C Gupta committee report delved on this in detail illustrating it in the evolution and economic purpose of derivatives.

Readers who would have read our half yearly outlook on India (28 July) would have seen how illusionary the hedging process is. If between 24 sector pair trades one could create 32% annualized returns with the maximum ruling at 173% (Sensex - Real) and only six out of 24 pairs delivering less than 5% annualized returns, there was something about hedging or pair returns we do not know. One might also say, “what about BETA?” (the sensitivity quotient between assets). We are comparing sector indices here and if you think beta argument can really disprove these results, it is a tough task. We can demonstrate not only returns between highly correlated and similar beta assets but also between an asset and its own stock future (Long Nifty - Short Nifty Futures). The best part is that it’s all very simple.

So what happened? Did the hedge ratio fail? How could a conventional risk management idea make money or for that matter lose it? If you were long Sensex and short BSE Real, you would have lost 173% annualized. The idea is not just about lack of trading instruments. India doesn’t have well traded sector futures and options, as market participants focus more on stock futures than understanding or trading sectoral exposures.

Are we correct in saying that Hedge funds did everything but hedging that’s why they went under? Did we ever think that there could be gaps in the hedging theory and that’s why what was not supposed to sink, drowned? The idea that in the long term it works could also be an illusion, as there are costs involved and hedging as an activity is more about minimizing losses rather than eliminating them. The very reason there are not very many companies offering hedging solution. Did Hedging outfits suffered because the cost of hedging was exorbitant?

The arbitrage philosophy

Understanding hedging has a lot to with how we comprehend the hedge process. Arbitrage pricing theory (APT) is a general theory of asset pricing that has become influential in the pricing of stocks. APT holds that the expected return of a financial asset can be modeled using the sensitivity factor aka beta coefficient. The derived rate of return will then be used to price the asset. If the price diverges, arbitrage should bring it back into line. Arbitrage is the practice of taking advantage of a state of imbalance between two or more markets and thereby making a risk-free profit. The theory was initiated by the economist Stephen Ross in 1976.

This back into line philosophy is at the heart of the hedge failure. This could also be the reason why we as a society are running farther from understanding risk than getting closer to comprehending it.

History of statistical arbitrage

How far we are from understanding cyclicality, time and fractals and how poorly we implement them in our strategies can also be understood by studying the history of statistical arbitrage. Statistical arbitrage aka stat. arb was started in 1985, a decade after the APT. Reversion to mean was born. In his recent book Statistic Arbitrage, Andrew Pole comprehensively delves into stat arb. Pair trading was a simple idea of trading similar historical prices. The strategy was based on reversion, which occurs everywhere and anywhere. This was a sign of fractalled nature, but the author barely mentions the term (three times) in his 257 page work.

Despite the lack of fractal details, the normal distribution in prices needed for reversion in prices is dismissed as an erroneous claim. Fractal watchers do the same as heavy tails and power law are the mathematical explanation for fractals. The author spends a few chapters of the book explaining why stat. arb. was beset with problems starting from 2000 and how the strategy exhibited a diminished economic potential. He cites ideas like more advanced algorithms, volatility, vagueness of practitioners, and lack of knowledge on part of the investors.

The author asks a lot of relevant questions like how does one identify when a price is away from the mean and how much? How long will the return to mean take? Are heavy tails the reason for frequent miscalculation and underestimation of risk? Why simple probability theorems cannot guarantee reversion which is challenged by heavy tails? Why we must always learn from the predictable occurrences, however odd they may look at first sight? Why we should be buying in weakness and sell in strength? Why patterns of stock prices are occurring at least two higher frequencies above in time scales? Why LTCM failure could have been linked to higher time frequency patterns? Why Gauss is not the God of reversion?

But the book fails to admit time cyclicality and builds it case mostly through reversion. Somewhere simplistic thinking takes over simple thinking. Like how to judge whether a spread tomorrow will be greater or smaller. If it’s greater than the mean today it will be smaller tomorrow. Pole also looks at reversion to mean as more magical than the fractalled nature of markets. Though he mentions that mean reversion involves temporal dynamics and time frequency analysis, temporal aspects are the source of profits, trades at a point of time are the means with which the opportunity is exploited, but there is not even one mention of time cyclicality in the book. It’s not the first time that we have missed the idea.

Missing the idea

The idea dismissed by Pole that simple probability theorems cannot guarantee reversion are strangely the same ideas explored by other revisionists. Larry Connors of Trading markets searches for statistical probabilities that help traders profit when stocks revert to the mean. “The further prices stretch away from the mean on a short term basis, the sharper they snapback”, Connors was quoted in Bloomberg Markets. Connors and Ceaser Alvarez, are ex Microsoft engineers who worked on the development team of excel program. They seek to identify tradable price patterns based on statistical probabilities. The duo works with a large database of 8.5 million trades.

Robert Shiller’s MacroMarkets’ is also not free of mean reversion. In his 1993 book, MacroMarkets: Creating Institutions for managing society’s Largest Economic Risks, the author talks about unmanaged risk and the need for a risk management solution. To hedge Oil risk MacroMarkets introduced a new way to include Oil in a portfolio. Dubbed Macroshare $ 100 Oil UP and Macroshare $ 100 Oil DOWN exchange traded securities issued by paired trusts. According to a Bloomberg market report, “the trusts have an income distribution agreement under which assets flow from one to another in proportion to the level of the benchmark”.

As OIL moves above or below 100, the funds flow from one bucket to the other. This is supposed to be a hedging mechanism to help people. Whether we call it an innovative solution, this is still a pair attempt at managing risk. Pair trading based on reversions are far from perfect and prone to failure. The idea about comprehending markets is tougher than the idea of comprehending market cyclicality. This is why teaching market participant’s cyclicality by creating more pair offers is just adding to the already oversaturated market. The market is already trying to take a detoxifying pause from structured products.

The behavioral finance idea of losers vs. winner’s index has more merit because it illustrates cyclicality. The only unfortunate part is that behaviorologists don’t admit that the idea of selling winners and buying losers is the central idea of performance cycles.

Conclusion

A hedge is not only imperfect but inefficient and costly. Statistical arbitrage is a euphemism for Time arbitrage, performance cycles and till the time we don’t focus attention on TIME our attempt to understand risk will fail. We will have someone or something to blame then. According to Paul Samuelson, “Financial engineering is like science that can help mankind or create atomic bombs”. We will worship Beta and then pronounce it dead, rechristen it later as Jenson Beta, but there is one think we will intuitively avoid. How can it be so simple?


ELLIOTT VS TIME

Challenging a seventy year old market forecasting theory isn’t easy. It is tougher if one is a practitioner himself and a believer in the Elliott wave theory of price fractals. However, when we talk about TIME FRACTALS, PRICE FRACTALS have a strong challenger, even if the theory of TIME is at a nascent stage.

We should admit that it was a pleasant surprise after nearly 10 years of digging price patterns to reach TIME FRACTALS. The latter part of the year will be devoted to explaining ELLIOTT FRACTALS through TIME. The two rules of Elliott i.e. 3 wave is never the shortest and 2 wave does not get into 1 are rules of TIME also seen in Elliott waves. Currently EWT is the closest theory to TIME.

Illustrated below is a small example of a performance cycle between BSE500 (Indian 500 stock composite) and BSE30 (Indian 30 blue chip composite). Performance cycles are the direct proof of cyclicality in time or fractal nature of time. If we can prove that an asset A outperforms and underperforms asset B in a cyclical nature, we are simply proving that a ratio line which has no units of price associated with is has an order associated with it. Why anybody did not see it yet and we are the only one talking about it, because the idea is too simple to be accepted or believed. As we say the idea of time driving markets and nature is ahead of its time.

INDIAN PAIRS

So what is with BSE500 and BSE30? Can you really make money on SHORT BSE500, LONG BSE30? On a primary basis, markets have witnessed about 10 performance tops on BSE500 against BSESN since 2000. Barring one signal, rest all of them came at or near historical tops viz. Mar 2002, Jan 2004, and Jan 2008. Where are we on BSE500 vs. SENSEX now? The performance cycle between BSE500 and SENSEX (BSE30) just like its global peer is at an extreme. This might look coincidence, but even if there is a relative performance cycle between DOW and SENSEX, global equities move together. The broad market indices weakening against blue chip indices don’t excite us. They tell us that the best part of the 2009 bull reprieve is over and whatever reason we may give us, the odds are against us as equity owners. India is a great story. It will be always a great story. But if the broad market depicted by BSE500 decides to falter against top 30 stocks, markets are heading for atleast a month or two of exhaustion. The post Jun low which could push markets higher seems a bit distant at this stage.

There are some extreme variations in results starting 5% to 60% annualized. But the interesting part is that the strategy delivered positive results most of the time. 20% average spot annualized gains are not easy to ignore whether you are fund manager or a trader. Leverage on derivatives makes this simple strategy look too good to be true. We will see how the strategy works out now.

AMERICAN EQUITY PAIRS

Performance cycles can shed some light on where Sensex and global equities are headed. A global pair relationship between S&P500 and DOW 30 illustrates the relationship between broad 500 stocks and 30 blue chips. We write about the two indices and the performance cyclicality between them. The pair hit a CYCLE low, both on an intermediate and primary basis on 23 Nov 2008. This suggested that the broad 500 blue chips could not underperform the top 30 American blue chips any more. Why? Because performance cycles are based on time fractals, there is an order in which broad market performs or underperforms the blue chips. Market turnarounds have a lot to do with the respective dynamics.

When broad markets fall against blue chip, rises become shallow and unsustainable. Another interesting aspect to be observed here is that it’s only now after Nov that the broad market has turned lower against DOW. This removes any doubt for us that the intermediate path of least resistance remains lower not higher for American equities. READ MORE….

CROSS PAIRS

Then there are cross pairs. The anticipated turn on OIL we talked about happened. Prices fell nearly 23% from Jun highs. READ MORE…

METAL PAIRS

In conclusion, pair performance demonstrates the mathematical nature of time and how markets move from disequilibrium to equilibrium oscillating in an ordered fashion. We can keep trying to avoid time, ignore it, but it will continue to manifest in various forms, various global pairs creating risk and return in a fractalled way telling us that SHORTING S&P500 and going LONG DOW may not be such a bad idea after all. READ MORE…

*This is a perspective product and not a strategy product. Long Short strategies are not riskless strategies. Please mail us for a detailed working or consult a local financial risk manager to execute these pairs. For more details please subscribe to the ECONOHISTORY research products.


ECONOHISTORY PAIR TRACKER

 

 

These are some of the pairs we initiated recently across global markets, commodities, India and Romania. The best pair returns were delivered by Long BRD, SHORT BETFI at 24% (66 DAYS). The other top pairs were LONG Nat Gas, SHORT OIL. The pair delivered 18% over 24 days. It might look surprising for a conventional researcher, how something so simple can be profitable. But then what is simple is the toughest to believe. None of the pairs are in a loss, every pair delivered. We will be adding more pairs to our trackers over the coming weeks. This is a perspective product and not a strategy product. Long Short strategies are not riskless strategies. Please mail us for a detailed working or consult a local financial risk manager to execute these pairs. Also please keep in mind, we are just illustrating entry points here. For exit time horizon please subscribe to our weekly ECONOHISTORY product.

 

On the naked asset side, we continue to be negative on local markets. We will be coming out with the Romanian Sentiment Survey shortly.

 

Enjoy the latest WAVES.ROM

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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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