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Quantocracy’s Daily Wrap for 06/01/2015

This is a summary of links featured on Quantocracy on Monday, 06/01/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • SPX Iron Condor – High Loss Threshold Results Summary [DTR Trading]

    Over the last four blog posts we looked at eight different exit approaches for a standard SPX iron condor with 25 point wings. These exits included: STD – NA%:NA% – exit at 8 DTE. STD – NA%:50% – exit if the trade has a profit of 50% of its initial credit OR 8 DTE. STD – 100%:50% – exit if the trade has a loss of 100% of its initial credit OR if the
  • Ignore the Margin Debt Alarm [EconomPic]

    Ignore the Margin Debt Alarm The margin debt alarm has seemingly been sounded every few months when investors realize absolute levels of margin debt has reached new all-time highs (inferring that risk taking has too reached all-time high levels and stocks are at risk). This brief post highlights why any such alarm (and any future margin debt alarm) should likely be ignored.
  • Fooled by Monte Carlo Analysis [System Trader Success]

    Simple Monte Carlo analysis tools are often used to assess the risks of trading systems and to determine appropriate capitalization levels. However, simple trade reshuffling algorithms can produce misleading results in many cases and fool their users. There are several Monte Carlo analysis tools available to traders. Some of these are even distributed for free via popular f
  • Investors Pay Premiums For Bad Bets [Larry Swedroe]

    The first formal asset pricing modelthe capital asset pricing modelwas built on certain assumptions, including that investors are risk-averse; will maximize the expected utility of absolute wealth; and care only about the mean and variance of return. However, academic research has found that these assumptions dont necessarily hold. In the real world, some

Quantocracy’s Daily Wrap for 05/30/2015

This is a summary of links featured on Quantocracy on Saturday, 05/30/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Chapter 5 The Permanent Portfolio [Meb Faber]

    This excerpt is from the book Global Asset Allocation now available on Amazon as an eBook. If you promise to write a review, go here and Ill send you a free copy. – Harry Browne was an author of over 12 books, a one-time Presidential candidate, and a financial advisor. The basic portfolio that he designed in the 1980s was balanced across four simple assets
  • What Do Falling Corporate Profits Mean With Stocks Near Their Highs? [Dana Lyons]

    If youve followed this blog for awhile, you may have noticed that we dont cover fundamental or economic data too often. That is for a good reason: we dont use it, at all. Occasionally, however, a data point will cross the radar that piques our interest for whatever reason. So it is with the current state of U.S. Corporate Profits. The U.S. Bureau of Economic Analysis released the lat
  • Discussing Deep Value and the Acquirer s Multiple at Harvard [Greenbackd]

    A little over a month ago I travelled to Harvard to speak to Michael Parzens business statistics class on Deep Value and the acquirers multiple. Here is the recording of that talk. You can get a free list of the best deep value stocks in the largest 1000 names on The Acquirers Multiple. Buy my new book Deep Value: Why Activist Investors and Other Contrarians
  • Equally Weighted Portfolios [John Orford]

    Old school German and Austrian professors operate on 'academic time'. When you are told to meet at 3, they really mean a quarter past. You wouldn't want to reverse the tables though. Better to be a quarter of an hour too early than too late. I never got the hang of academic time. Same with investing. Rather than getting your fingers bu

Quantocracy’s Daily Wrap for 05/28/2015

This is a summary of links featured on Quantocracy on Thursday, 05/28/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • What has Worked in June [Quintuitive]

    Time to start looking at the next month. Lets start with the top five performing futures (ordered by winning percentage): Future Total Months Winning Months Mean Return Median Return 30-Year Bond 37 68% (25) 9.62% 1.57% Canadian Dollar 37 68% (25) 0.07% 0.53% 10-Year Note 32 63% (20) 9.46% 1.45% Feeder Cattle 37 62% (23) 0.83% 0.
  • Basic Factor Analysis: Simple Tools to Understand What Drives Performance [Alpha Architect]

    Investors should know what they are buying and why they are buying it. Unfortunately, more often than not, investment products are jammed down the throats of unsuspecting victims who are either ignorant, easy to influence, and/or dont really care. We highlighted an extreme example of this in the form of a 3% front-end load, 60bp management fee S&P 500 Index Fu
  • Momentum Environments [Systematic Relative Strength]

    How consistent are Momentum returns? This is among the most frequently asked questions about Momentum (and about any investment strategy for that matter). One way to answer this question is to look at the following table from a white paper published by RBC Capital Markets. According to their research, Momentum outperformed the S&P 500 in every decade since the 1930?s. Yes, the margi
  • SPX Iron Condor – High Loss Threshold – 80 DTE [DTR Trading]

    This post looks at a standard (STD) one-lot iron condor on the S&P 500 Index (SPX), initiated at 80 days-to-expiration (DTE). The results in this post were derived from approximately 3200 individual trades entered by the backtester. For background on the setup for the backtests, as well as the nomenclature used in the charts and tables below, please see the introductory ar
  • Amazing paper related to several momentum strategies [Quantpedia]

    #2 – Asset Class Momentum – Rotational System #3 – Sector Momentum – Rotational System #8 – FX Momentum #14 – Momentum Effect in Stocks #15 – Momentum Effect in Country Equity Indexes Authors: Geczy, Samonov Title: 215 Years of Global Multi-Asset Momentum: 1800-2014 (Equities, Sectors, Currencies, Bonds, Commodities and Stocks)
  • Using Leadership Index to Time S&P 500 [Systematic Investor]

    To install Systematic Investor Toolbox (SIT) please visit About page. Following is code and plots used in RFinance 2015 presentation. We will use a C++ function to compute Lagged Correlations from the Run Leadership Rcpp post. First, lets load historical prices for S&P 500. Please note that we are using current companies in the S&P 500 index and a
  • A Statistical Interpretation of Black Scholes [John Orford]

    I love the tingling sensation when some new idea or revelation becomes clear. Perhaps not 100% clear, but you get close enough that you can almost taste it. That happened to me when I read about the Pythagorean interpretation of special relativity. Nice to understand 20th century physics first in terms of Euclidean space and then make a small jump into Minkowsk
  • Moved Quantscript to GitHub [Quintuitive]

    Quantscript is an old project of mine, which was hosted on google.code. Since google.code is shutting down, I had to either scrap it or migrate it to GitHub. I am not using this code on a daily basis anymore, and since the project is relatively small the natural thing would have been to scrap it. However, I found myself a few times over the years pulling out the source code of the pro
  • [Academic Paper] Uncovering Trend Rules [@Quantivity]

    Uncovering Trend Rules

Quantocracy’s Daily Wrap for 05/27/2015

This is a summary of links featured on Quantocracy on Wednesday, 05/27/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • ETF Sector Rotation Ideas from readers [Alvarez Quant Trading]

    The post ETF Sector Rotation generated some good ideas on what to try differently. This post will focus on two ideas on the Select Sector SPDR ETFs. The next post will look at two ideas using Fidelity sector mutual funds. ETF Universe These tests will use the Select Sector SPDR ETFs. The list is Consumer Discretionary (XLY) Consumer S
  • Using the Price-to-Book Ratio [Investor’s Field Guide]

    Having explored the history of the price-to-book ratio, we can now turn to its usefulness as a stock selection criterion. The data suggests a few important points about the price-to-book ratio: It has worked quite nicely in small-cap It has not worked as well in large-cap stocks Price-to-book delivers the best returns when it is used to compare each
  • Risk-Managed Momentum Outperforms [Larry Swedroe]

    Momentum has been found to be a persistent and pervasive factor in the returns not only of stocks, but of other asset classes (including bonds, commodities and currencies). Compared with the market, value and size risk factors, momentum in equities has earned both the highest premium and the highest Sharpe ratio. However, momentum has also experienced the wor
  • SPX After Quick Drops From 50-day Highs [Quantifiable Edges]

    The study below is one I have shown here on the blog for a long time. It looks at relatively sharp selloffs from intermediate-term highs. It shows that there has been a strong tendency for situations like the current one to bounce. Results are updated. The stats all suggest an upside edge over the next 1-5 days. Traders may want to keep this in mind the next few days. Want research like this
  • Weekly Commentary The 60/40 Forecast: 0% through 2025 [Flirting with Models]

    Benjamin Graham, father of value investing, once said: in the short run, the market is like a voting machine but in the long run, it is a weighing machine. The psychology factor that can dominate market returns and volatility in the short-run is often washed out in long-run annualized returns, which is dominated by economic and valuation factors. While valuations may ser
  • A Breakout To Nowhere [Dana Lyons]

    Weve spent a good deal of ink over the past few months on the trendless, range-bound action that has characterized the U.S. stock market recently. This trading range has been, after all, the dominant factor in the equity market. And an epic, even record-setting, trading range it has been. Our expectations based on much of the research weve done has been that once the market br
  • Good News Bonds, Bad News Bonds [Jay On The Markets]

    First the (potential) good news. The (potential) good news is that one trend in bonds that I wrote about a while back here and here may finally (potentially) be playing out the right way. Although, as there are still three more trading days left in the month of May, it is clearly a little early to declare victory. In any event, the trend I am referring to is the histo

Quantocracy’s Daily Wrap for 05/25/2015

This is a summary of links featured on Quantocracy on Monday, 05/25/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Development of Intermarket Trading Systems [System Trader Success]

    In my past article, Intermarket Is Fundamentally Sound, I covered some of the basic premises and history of intermarket trading systems. While the previous entry was more theoretical, this article is more practical. Indeed, I will be discussing how intermarket analysis can be used to generate mechanical signals. I will also walk you through the process I followed in developing and impr
  • Building Algorithmic Trading Systems for the Forex market. Part 2: Where to look [Mechanical Forex]

    On my last post we discussed the first step necessary to become a successful algorithmic trader: to get a solid formation in statistics and programming. Once youre done with this step you will then need to confront the problem of building profitable trading strategies to trade the currency markets. Doing this is no easy task since there are a myriad of things you can do to
  • SPX Iron Condor – High Loss Threshold – 66 DTE [DTR Trading]

    This post looks at a standard (STD) one-lot iron condor on the S&P 500 Index (SPX), initiated at 66 days-to-expiration (DTE). The results in this post were derived from approximately 3200 individual trades entered by the backtester. For background on the setup for the backtests, as well as the nomenclature used in the charts and tables below, please see the introductory ar
  • Accounting for Data Mining Bias [Dekalog Blog]

    I've recently subscribed to this forexfactory thread, which is about using machine learning to develop trading systems, and the subject of data mining/data dredging has come up. This post is a short description of how mining/dredging can be accounted for, but readers should be aware that the following is not a precise description of any particular test with accompanying code, but rather

Quantocracy’s Daily Wrap for 05/24/2015

This is a summary of links featured on Quantocracy on Sunday, 05/24/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Why Steady Vol Works [John Orford]

    Contrary to what people say every now and again, history never ends. Not like humans end with a monotonous beep out of a heart monitor. Life goes on, hearts keep thumping. When I was an English teacher in Germany. One of my students showed up for the first day of class. She was unemployed and the local 'work office' sent her to learn E

Mini Mashup: Changes Afoot in VIX Trading

There are some changes afoot in the VIX trading space with the launch of the VIX ETFs VXUP and VXDN. Even if you don’t trade those specific products, they might be having a knock-on effect on VIX futures, which would impact all other VIX ETF/ETNs like VXX and XIV. There is a subset of our readership that trades VIX products, and so below I link to six posts from bloggers in our Mashup that hint at this potential impact of VXUP and VXDN.

Quantocracy’s Daily Wrap for 05/20/2015

This is a summary of links featured on Quantocracy on Wednesday, 05/20/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Intermarket Analysis: The Pathfinder | Trading Strategy (Filter) [Oxford Capital]

    I. Trading Strategy Developer: Nelson F. Freeburg. Concept: The currency trading strategy based on the intermarket analysis. Source: Freeburg, N. F. (Dec. 1993). Formula Research, Quantitative Treatment of the Financial Markets. Memphis, TN: Formula Research, Inc. Research Goal: Performance verification. General Description: The Pathfinder currency trading system uses the
  • An Unfolding Finite Difference Algorithm in Javascript [John Orford]

    very model's assumptions get thrown out the window as soon as things get really rocky. Every model is short vol. Even those for which getting volatility right is crucial! Take the binomial tree approach to pricing options for example. See my previous post here. From 'Paul Wilmott Introduces Finance' Unfortunately as volati
  • The Europe Catch-Up Trade… $FEZ [@NautilusCap]

    The Europe Catch-Up Trade… $FEZ
  • New Paper from GestaltU and QuantStrat TradeR: Momentum and Markowitz: A Golden Combination (PDF)

    Mean-Variance Optimization (MVO) as introduced by Markowitz (1952) is often presented as an elegant but impractical theory. MVO is "an unstable and error-maximizing" procedure (Michaud 1989), and "is nearly always beaten by simple 1/N portfolios" (DeMiguel, 2007). And to quote Ang (2014): "Mean-variance weights perform horribly The optimal mean-variance portfolio is a
  • A Few Notes on Invest with the Fed [CXO Advisory]

    In the introduction to their 2015 book entitled Invest with the Fed: Maximizing Portfolio Performance by Following Federal Reserve Policy, authors Robert Johnson, Gerald Jensen and Luis Garcia-Feijoo state: Our purpose in writing this book is to provide a general overview of the Feds role in the financial markets, but, more important, to offer investors a road
  • Why We’ve Done Away with Down Voting [Quantocracy]

    After a few days of living with our (pretty awesome) new voting feature at Quantocracy, weve opted to do away with down voting. Readers can now choose to either vote up or not vote at all on each link. We try to keep things friendly around these parts, and the down voting just began to feel a little dirty. With up voting only, good content will still get more eyeballs, blo
  • A Magical Metric That Isn t [Larry Swedroe]

    I was recently asked to comment on an article that appears in the April 2015 issue of the American Association of Individual Investors Journal. The article is based on the paper Mutual Funds R2 as Predictor of Performance, which was published in the March 2013 issue of The Review of Financial Studies. As you may have already guessed, the study, which cover
  • Dow Divergences Part 2: Utilities [Dana Lyons]

    This is part 2 of our series (or mini-seriesTBD) on divergences. As we stated yesterday, divergences (in which one index achieves a new high whereas another does not) are generally over-cited as red flags. The problem is that the timing of their repercussions on the market – if any actually materialize – is extremely difficult to get right. Divergences can persist for a long time witho
  • Will Natural Gas Break Wind in June? [Jay On The Markets]

    See Jays recent post: One More Plunge for Crude Oil? If you are an ardent believer in the phrase if something looks too good to be true it probably is, then youd better brace yourself. Because a sure-fire, cant miss, you cant lose thing is on the horizon in natural gas. Well OK, at least thats the theory. A Bearish Seasonal Trend in Natural Gas
  • [Academic Paper] Modelling Systemic Price Cojumps with Hawkes Factor Models [@Quantivity]

    Modelling Systemic Price Cojumps with Hawkes Factor Models
  • Stock Returns Around Memorial Day [CXO Advisory]

    Does the Memorial Day holiday signal any unusual return effects? By its definition, this holiday brings with it any effects from three-day weekends and sometimes the turn of the month. Prior to 1971, the U.S. celebrated Memorial Day on May 30. Effective in 1971, Memorial Day became the last Monday in May. To investigate the

Why We’ve Done Away with Down Voting

After a few days of living with our (pretty awesome) new voting feature at Quantocracy, we’ve opted to do away with down voting. Readers can now choose to either vote up or not vote at all on each link.

We try to keep things friendly around these parts, and the down voting just began to feel a little dirty. With up voting only, good content will still get more eyeballs, bloggers will still be encouraged to write even better content, and we’ll all get to continue spreading positive vibes.

We appreciate the readers who have taken the time to vote so far, and your previous votes, both up and down, will still be included in the vote totals.

Read on readers!

Mike @ Quantocracy

Quantocracy’s Daily Wrap for 05/19/2015

This is a summary of links featured on Quantocracy on Tuesday, 05/19/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Tactical Asset Allocation: Beware of Geeks Bearing Formulas [Alpha Architect]

    How Should I Tactically Allocate my Assets? A lot of investors ask this question as their wealth grows and the number of financial products grows exponentially. In order to generate a response, investors pay money to professional finance geeks who often present complex formulas as a solution to the asset allocation problem. Last year, when I was asked to present a seminar o
  • Dow Divergences Part 1: Transports [Dana Lyons]

    Divergences are one of the most oft-cited arguments in calling tops. They are also perhaps the least accurate. Thats because divergences (whereby one index reaches a new high while another fails to do so) both A) occur frequently and B) can persist for lengthy periods of time. For those reasons, we are not huge proponents of sending out alarm bells based solely on divergences. It is tr
  • Bayesian Inference of a Binomial Proportion – The Analytical Approach [Quant Start]

    In the previous article on Bayesian statistics we examined Bayes' rule and considered how it allowed us to rationally update beliefs about uncertainty as new evidence came to light. We mentioned briefly that such techniques are becoming extremely important in the fields of data science and quantitative finance. In this article we are going to expand on the coin-flip example
  • Daily Academic Alpha: Which Trend is Your Friend? [Alpha Architect]

    Which Trend Is Your Friend? Managed-futures funds (sometimes called CTAs) trade predominantly on trends. There are several ways of identifying trends, either using heuristics or statistical measures often called "filters." Two important statistical measures of price trends are time series momentum and moving average crossovers. We show both empirically and theoretically
  • Is your glide path too risky? [Flirting with Models]

    The theory behind the glide path is easily distilled: as we grow older and approach retirement, we transition from an primary objective of growth to one of capital preservation. Our allocation profile, therefore, should follow this transition. Close to retirement, when capital preservation is paramount, stocks are riskier than bonds. Further from retirement, when growth i
  • SPX Iron Condor – High Loss Threshold – 38 DTE [DTR Trading]

    This is the first article in a series where we will look at the performance of the iron condor options strategy, where the loss exits will be greater than the profit exits. For background on the setup for the backtests, as well as the nomenclature used in the charts and tables below, please see the introductory article for this series: Iron Condor Series – Higher Loss Thresholds