Archive for the ‘Time Triads’ category

The Rational Exuberance

 

In the age of information, quotes become books and books become religion, almost. Robert Shiller’s Irrational Exuberance was a voice of caution that appeared in March 2000, before the start of a decade long sequence of negative fluctuations. The book itself was written about economic bubbles and investor psychology.

Shiller’s based his work on his 1981 research paper in the American Economic review, where he showed the divergence between fundamentals and market prices. He took the present value (PV) of dividends paid on S&P composite stock price index discounted by a constant real discount rate for the period (1871-2002). He illustrated that PV behaves remarkably like a stable trend. In contrast, stock price index gyrates, wildly up and down around this trend. Shiller’s contention was that the divergence was much larger than what valuation could explain. Price change was driven by psychology not by fundamentals. He suggested feedback dynamics between human interactions as the explanation for excessive volatility or bubbles.

Who owns the truth?

On one side Shiller and other new age experts highlighted the weakness in the assumption of efficiency, but on the other hand was it correct to swing to total irrationality (inefficiency)? Why could we not give benefit of doubt to earlier thoughts on rationality (normality)? After all there were no tera-bytes of data and real computing power. In hindsight the rationalist argument might have gaps, but how do we think tomorrow would judge the “irrationalists”?

A recent award winning paper by David N. Esch in the Journal of Investment Management addresses the…

This article was written for Business Standard

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Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.


The Weeping Willow

I was invited to give an inspiration talk at the Startup Weekend for the global Jade network. KJ, a friend of mine, an international expert on e gaming and netpreneur could not avoid a smirk, “Mukul and inspirational talk”. He knew me well and was much updated about the contrarian me and our idea of glorifying the worst. Unmindful of KJ’s de-motivation, I went ahead and delivered the following talk.

It was sometime in June 2005, I was with my partner in an art museum looking at the picture of a Salcia tree. Salcia’s are a predominant species here in Cluj. She told me about the Greek tragedy (Death of Eurydice) linked with Salcia, popularly known as ‘The weeping willow’. We were looking for a name for our company and after hearing the tragedy I started toying with the idea ‘The Weeping Willow Inc.’ I foresaw an economic tragedy and saw a perfect fit. But then we are in the age of euphemisms, hard truths can be bad for business. This is how we chose ‘Orpheus’ as a name for our company.

Now 7 years later, sorrow seems to have transcended from the painting on the wall to austerity and debt worries driving Greek pensioners to suicide. We are living tragic times where more than 40% of Spanish youth from 15-24 are jobless. One might say India is another world. It’s an illusion. Almost half a billion India is young. You should read the recent TIME story on ‘Children of the New India’. Disappointments rarely make headlines, till it creates Mohammed Bouazizi or the Tibetan youth immolating himself in Delhi, protesting Chinese interference in Tibet.

This could also seem disconnected to the economic reality. But it’s not. Economics 101…

This article was written for Business Standard

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Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.


Technically Speaking

Mukul’s article was published in the latest Technically Speaking.


The Purposeful Time

Romancing Himalayan is a magazine published from Jammu, India by Kashmirink.


Investing like Odysseus

Odysseus has traditionally been viewed in the Iliad as Achilles’ antithesis. Unlike Achilles whose anger is self-destructive, Odysseus is renowned for his self-restraint and diplomatic skills.

While passing through the land of sirens, known for their luring fatal songs, he orders his men to stop their ears with beeswax and ties himself to the mast of the ship. Recognizing that in the future he may behave irrationally, Odysseus limits his future agency and binds himself to a commitment mechanism (i.e. the mast) to survive this perilous example of dynamic inconsistency.

In economics, dynamic inconsistency, or time inconsistency, describes a situation where a decision-maker’s preferences change over time in such a way that what is preferred at one point in time is inconsistent with what is preferred at another point in time.

A simple analogy to investing and time preference would be trading gains and losses. It has been observed that that the investing community is more eager to cut out gains faster than a similar amount of loss. This can be explained from a temporal perspective also. When choosing between $100 or $110 a day later, individuals may want to wait a day for an extra $10. Yet after a month passes, many of these people will reverse their preferences and now choose the immediate $100 rather than wait a day for an additional $10.

The eagerness to consume, or instant gratification compared to deferred gratification is what differentiates the investing majority from the Odysseus minority. Investing is a lot about self restraint. Humans give more importance to today compared to tomorrow, the idea of “now” is more important than to the idea of some distant time in the future.

Temporal discounting refers to the tendency of people to …

This article was written for Business Standard

Mail us for subscription details or download the report from our Reuters store.

Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.


Dow @ 20,000

Proportion is mathematical. This is why Elliott beautifully illustrates the proportional structure on markets. In this update we question some Elliott assumptions and highlight some observations on Dow Jones Industrial and the overall market structure.

Fig. 1: This is a classic five wave structure from 1789 to 1990. The 1990 highs seemed like a top, but markets continued to extend more than a decade after the respective high well into 2000.

Fig. 2: Elliott Wave structures give 2000 top a high importance. This importance rests on the super cycle fourth wave low at 1982. If that low is assumed to be in 1975 and not in 1982, the count would change. This would suggest that the all time top is still not in place and markets could extend higher above 2000 all time highs.

Fig. 3: This is the five wave structure from 1932 lows.

Fig. 4: This is the five wave structure from 1975 lows. As one can see the time taken by the second wave is marginally smaller than the time taken by the IV cycle wave (3300 days). The difference appears large on a visual chart with an arithmetic scale, but on a log scale both price and time suggests that the Dec 1974 and Aug 1982 price structure (1 and 2 cycle wave) can be compared with the Jan 2000 and March 2009 structure (III and IV cycle wave).

Fig. 5:  All the above cases suggest that if we extend the channel high of the supercycle count (Fig. 3) the DOW structure can see an extension till 20,000. Terminal waves are very tricky and this is not any terminal wave. This is a terminal wave of all available history of markets. Two decades of error in a history of pattern watching and Elliot counting from Dark Ages in 1330 should be acceptable.

Till 12,000 and 11,000 supports  stand firm on DOW, this preferred stands firm for us.

 

DOW @ 20,000 in Technically Speaking 

Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.


The Black Crow


Call it a good omen or bad, human beings have associated natural occurrences with events. Though ‘objectivists’ say human beings suffer from illusion and see what they want, reconsideration shows there is more to illusion than just a black crow or swan.

Watching a crow perched outside your window or a black swan (aka rare event) gliding on a lake or on the trading screen are patterns because they repeat, even if rarely. If there was constant crisis we would not connect them to rare events because there would be no precedent for it. Only when the passing comet coincides with a famine is it that we label its next passing as a bad omen. It’s the repetition or the cyclicality of a process that guides society to establish patterns, no matter their frequency.

The point I am making here is that identifying an outlier such as a crow perching itself outside your window and metaphorically connecting it to economics, sensationalising a fluctuation does not make it all objective. At the soul of every pattern is a repetition, a cycle. The pattern keeps repeating because the cycle keeps pulsating. So, if time is at the heart of every pattern, why do patterns sell more than a time cycle? Patterns do offer a story and humans love stories (Shiller in Irrational Exuberance), but is there really an objective reason, which can make cycles more objective and scientific?

To read the complete article visit Business Standard.


The Balaton Time


I revisited a friend at his Balaton lake house last weekend. Balaton is the largest lake in Central Europe also known as the Hungarian sea. Just 500 kilometers away and the weather was warmer than the cold snow packed Cluj. I had the sun, the view and more than a stack of books at his lakeside house. And as chance had to have it, next to Taleb’s signed copy of Black Swan was a book, ‘Riding the waves of culture’ by Fons Trompenaars. The book had a complete chapter on Time. This is the chapter abstract with my interpretation for you.

Culturally we either think of time sequentially as a series of passing events or synchronously with interrelated past, present and future. The ideas about the future and memories of the past both shape the present action. Time can be legitimately conceived of as a line of sequential events passing us at regular intervals. Or as cyclical and repetitive, compressing past, present and future by what these have in common, seasons and rhythms.

In the Greek myth the Sphinx, a monster with the face of a woman, the body of a lion and the wings of a bird, asked all wayfarers on the road to Thebes, ” What creature is it that walks on four legs in the morning, two legs at noonday and three legs in the evening?” Those unable to answer she ate. Oedipus, however answered “man” and the Sphinx committed suicide. He had grasped that this riddle was a metaphor for time. Four legs was a child crawling, two legs the adult and three legs and old person leaning on a stick. By thinking in a longer sequence about time, the riddle was solved.

How a culture thinks of time helps it interpret and find meaning in life. Even our conception of time is strongly affected by culture because time is an idea rather than an object. Emile Durkheim, the French sociologist, saw it as a social construct enabling members…

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Momentum, Reversion and Risk

We have spoken about reversion, or losers outperforming winners. This approach works. In their 1985 paper ‘Does the stock market overeact?”, DeBondt and Thaler explained the idea of mean reversion and how it leads to the Loser’s portfolio of 3 years outperforming the Winner’s portfolio of the same time. Findings of reversion in stock prices towards some fundamental values remain in literature for a decade. DeBondt and Thaler[1985] using overreaction showcased that a stock experiencing a poor performance over a 3-5 year of period subsequently tend to outperform that had previously performed relatively well. This implies that, on average, stocks which are ‘losers’ in terms of returns subsequently become ‘winners’ and vice versa. This is the reversion strategy.

In another paper written by Narasimhan Jagadeesh and Sheridan Titman in 1993 the authors illustrate returns to buying winners and selling losers. The conclusion of the paper states “Trading Strategies that buy past winners and sell past losers realize significant abnormal returns”. The paper studies the momentum strategy comprehensively but focuses on the behavioral aspect i.e. what investor behavior causes the superior returns to happen in the year following the portfolio formation data and then the returns dissipate within the following 2 years?

Both these papers are highly cited and are considered significant in Behavioral Finance. Thaler and Kahneman got the Nobel Prize in 2002 for their work. However despite such path breaking work application of the work is limited. Were the Behavioral Finance practitioners more concerned about the behavioral aspects in the investment business than about investment strategies? Is this the reason why we never had a study talking about this conflict? The conflict is that in markets it is profitable buying winners and selling losers and vice versa.

To read the complete article visit Business Standard.

Our Jiseki Time cycles are seasonal patterns of strength or weakness in assets. They are derived from percentile rankings from 1 to 100. The higher the percentile more the chance for an asset to weaken and worst the ranking, better the chance for the respective asset to outperform. 100 is top relative performance and 1 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. Jiseki is another name for Performance cycles, time triads and time fractals. The signals are illustrated as a running portfolio and as Jiseki Indices. These signals can be used by fund managers for relative allocations, traders for leverage bets and high net worth clients for selective trades.

Jiseki Interpretation. Signals are interpreted as crossovers between various Jiseki Cycles. All three Jiseki cycles (Jiseki 1,2 and 3) depict different time frames. Example: An asset is ranked above 80 percentile and all the three Jiseki cycles are pointing lower, this suggests a running SHORT SIGNAL. Our Jiseki Indices use different kind of exits based on price and Jiseki Cycles. We have color coded the (Jiseki 1>Jiseki 2) SHORT zones with brown sandy (burlywood) and grey (Jiseki 1>Jiseki2) for LONG SIGNALS.

Coverage: CNX 100 components and all Indian Sector Indices.

Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.

 


The Creative Leverage

 

Juicing the orange was a wonderful book I read in a long time. An economist dabbling with an ad book and writing about one might seem strange, but then are markets not about understanding trends, society, innovation and creativity. The book written by Pat Fallon founder of Fallon worldwide suggests creative leverage as the solution.

Fallon’s used creativity to offer real solutions for many brands. The case of ArcaAEX was unique. In 2002, the Securities and Exchange Commission (SEC) approved ArcaEX, as it was then known, as a full-fledged stock exchange so that it could directly compete with the New York Stock exchange (NYSE) and the Nasdaq. ArcaEX was virtual. It had a visibility disadvantage. By the end of the promotion 65% of professional traders used AracaEX. By 2005, the electronic stock exchange technology was accepted by traders. That fall, the 213 year old NYSE announced that it would merge with ArcaEX. Creativity overlaps. Just like ArcaEX used it to change the industry, Fallon used creativity to promote the exchange.

Somewhere creativity was about starting from scratch. It was about relentless reductionism, reducing the problem to a single insight. It got me thinking about creativity. What does creative leverage mean in capital markets? What hampered it all this while? Why don’t we have numerous ideas to make money? Why financial innovations suck? Are the economists really being creative? Or is economics so far from advertising, which is fun? Was creativity not about solutions and fun? In 1997, California Management Review published a study that investigated how experts in fields ranging from physics to art to business felt about such abstract concepts as wisdom, intelligence and creativity. It was only the businesspeople that tended to believe that it was unwise to be creative….

To read the complete article visit Business Standard.

Our Jiseki Time cycles are seasonal patterns of strength or weakness in assets. They are derived from percentile rankings from 1 to 100. The higher the percentile more the chance for an asset to weaken and worst the ranking, better the chance for the respective asset to outperform. 100 is top relative performance and 1 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. Jiseki is another name for Performance cycles, time triads and time fractals. The signals are illustrated as a running portfolio and as Jiseki Indices. These signals can be used by fund managers for relative allocations, traders for leverage bets and high net worth clients for selective trades.

Jiseki Interpretation. Signals are interpreted as crossovers between various Jiseki Cycles. All three Jiseki cycles (Jiseki 1,2 and 3) depict different time frames. Example: An asset is ranked above 80 percentile and all the three Jiseki cycles are pointing lower, this suggests a running SHORT SIGNAL. Our Jiseki Indices use different kind of exits based on price and Jiseki Cycles. We have color coded the (Jiseki 1>Jiseki 2) SHORT zones with brown sandy (burlywood) and grey (Jiseki 1>Jiseki2) for LONG SIGNALS.