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Quantocracy’s Daily Wrap for 05/07/2015

This is a summary of links featured on Quantocracy on Thursday, 05/07/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Sector Rotation with PnF Matricies [Systematic Relative Strength]

    Watering the flowers and pulling the weeds. Letting your winners run and cutting your losers short. There are different expressions for sector rotation, but it is among the most profitable investment strategies we have found, when done in a disciplined way. Sector rotation is based on the idea that there tends to be differencessometimes large differencesin performance between vario
  • A Guide to Creating Your Own Hedge Fund [EconomPic]

    As a follow-up to A Guide to Creating Your Own Smart Beta Fund, let's dive into the high flying paying world of hedge fund management.. Per Investopedia: Hedge funds are alternative investments using pooled funds that may use a number of different strategies in order to earn active return, or alpha, for their investors. Hedge funds may be aggressively mana
  • Combining Value Investing and Momentum Investing (Part 2) [Alpha Architect]

    A few weeks ago I wrote an article talking about ways to combine value investing and momentum investing. The high level takeaway from that article was to keep value and momentum as separate exposures. This conclusion was based on ranking firms on their combined value and momentum rankings, which can be described as follows: Rank all stocks on value Rank all st
  • Should Europe decline extend to 10%… [@NautilusCap]

    Should Europe decline extend to 10%…
  • Investing in Leveraged ETFs – Theory and Practice [Jonathan Kinlay]

    Summary Leveraged ETFs suffer from decay, or beta slippage. Researchers have attempted to exploit this effect by shorting pairs of long and inverse leveraged ETFs. The results of these strategies look good if you assume continuous compounding, but are often poor when less frequent compounding is assumed. In reality, the trading losses incurred in r
  • Real Momentum: A Time-Series/Absolute Momentum Strategy Including Inflation Expectations [CSS Analytics]

    Time-Series Momentum was introduced by Moskowitz and Pedersen of AQR circa 2011 and was popularized by Antonacci in 2013 as Absolute Momentum. Both measure the return of an asset in excess of the risk-free rate over some lookback window in order to determine whether to hold a long position in a given asset or whether to hold cash or go short. This method has been used by trend-foll
  • Hacking Google Finance in Real-Time for Algorithmic Traders. (2) Pre-Market Trading [Quant at Risk]

    It has been over a year since I posted Hacking Google Finance in Real-Time for Algorithmic Traders article. Surprisingly, it became the number one URL of QaR that Google has been displaying as a result to various queries and the number two most frequently read post. Thank You! Its my pleasure to provide quality content covering interesting topics that I find potentially useful.
  • Despite Historic Compression, Stocks Remain Range-Bound [Dana Lyons]

    On April 24, we posted what we thought (and hoped) would be our final post concerning the stock markets lengthy trading range. In the post we noted that for only the 8th time in 100 years, the Dow Jones Industrial Average (DJIA) had made it to 30 days without hitting either a 1-month high or low. It was, in our view, a pretty remarkable stat. Little did we know, however, that 8 days la
  • Dividend Champion Portfolio Update [Scott’s Investments]

    The High Yield Dividend Champion Portfolio is a publicly tracked stock portfolio on Scotts Investments. Its goal is to capture quality high yield stocks with a history of raising dividends. The screening process for this portfolio starts with the Dividend Champions as compiled by DRIP Investing. The list is comprised of stocks that have increased their dividend payout f
  • RUT Iron Condor – Dynamic Exit – 80 DTE – 12 Delta Continued [DTR Trading]

    This post is a continuation of the prior post. In this post we will look at the backtest results for dynamic exits of the 80 days-to-expiration (DTE) Iron Condor (IC), with 12 delta short strikes, with different profit and loss exits as a percentage of the initial credit. Recall that these RUT ICs were all constructed with 20 point wide credit spreads. This is a non-directional option

Quantocracy’s Daily Wrap for 05/06/2015

This is a summary of links featured on Quantocracy on Wednesday, 05/06/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Sharpe Ratio Redux [John Orford]

    My favourite restaurant in Singapore is near City Hall. Nalan's serves up the tastiest vegetarian food going. Every couple of weeks I go back and find a new and interesting dish. At lunch today my girlfriend ordered Manchurian cauliflower. Deep fried cauliflower in a Hokkien Chinese sauce which usually coats chicken. Think you know cauliflower? Not
  • New commodity bull market? [@NautilusCap]

    New commodity bull market?
  • How good is Smart Beta? [Alvarez Quant Trading]

    How good is Smart Beta? A popular topic lately has been Smart beta ETFs. What is smart beta? It is using different ways to weight an index and the ETF that tracks it. For example, the S&P500 index is a capitalization weighted index. Bigger companies have a larger portion of the index. If you look at the SPY, Apple which is the largest company, accounts for 4% of the index
  • The Search for Crisis Alpha: Weathering the Storm Using Relative Momentum [Flirting with Models]

    As we announced a few weeks back, our own Nathan Faber won 2nd place in the 2015 NAAIM Wagner Award paper competition for his research paper The Search for Crisis Alpha: Weathering the Storm Using Relative Momentum. Here's the abstract: Tactical strategies are becoming more prevalent in the marketplace, especially for downside protection. While many of thes
  • Momentum AND Diversification: A powerful risk-adjusted combination [Flirting with Models]

    As we announced a few weeks ago, our very own Andrew Gogerty won 3rd place in the 2015 NAAIM Wagner Award paper competition for his research paper Momentum AND Diversification: A powerful risk-adjusted combination. Here's the abstract: Diversification is discussed in nearly every portfolio construction conversation as a risk management tool. Momentum, on th
  • State of Trend Following in April [Au Tra Sy]

    A negative month in April for the State of Trend Following report, taking the performance below the break-even line for 2015. Please check below for more details. Detailed Results The figures for the month are: April return: -5.71% YTD return: -0.88% The figures above, compared with those in the State of Trend Following report I r
  • RUT Iron Condor – Dynamic Exit – 80 DTE – 12 Delta [DTR Trading]

    In this post we will look at the backtest results for dynamic exits of the 80 days-to-expiration (DTE) Iron Condor (IC) options strategy, with 12 delta short strikes, with different profit and loss exits. This is a non-directional options trading strategy that seeks to profit from a market that stays within a range between the two short strikes of the Iron Condor. For some
  • More Value Facts And Fiction [Larry Swedroe]

    Earlier this week, we began discussing some of the more pervasive and enduring facts and fictions surrounding the value premium. But it's important to understand that the value premium-a phenomenon in which securities that sell at low prices relative to fundamental metrics outperform on average securities that sell at high relative prices-is an empirical fact.
  • Cornish Fisher Timing Strategy Video [John Orford]

    Peter Urbani sent me a timing strategy based on the Cornish Fisher expansion. The world of cumulants is new and fascinating. I took the liberty to code up the strategy using the Backtesting IDE. The contrast between using spreadsheets and code for this type of strategy is stark. Download the code here.

Quantocracy’s Daily Wrap for 05/05/2015

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

  • A Recipe for the 2008 Financial Crisis [Stuart Reid]

    In 2008 when the market crashed I was 16-years old and visiting London for the very first time. At that age I was already obsessed with the markets. Feeling confident that I could understand the crash after having read books like Security Analysis, The Intelligent Investor, and Common Stocks and Uncommon Profits, I bought a copy of the Financial Times and started reading. I didn't under
  • New related paper to #12 – Pairs Trading with Stocks [Quantpedia]

    This paper tests the Pairs Trading strategy as proposed by Gatev, Goetzmann and Rouwenhorts (2006). It investigates if the profitability of pairs opening after an above average volume day in one of the assets are distinct in returns characteristics and if the introduction of a limit on the days the pair is open can improve the strategy returns. Results suggest that indeed pairs opening
  • Data Science and Trading: Common Problems [Inovance]

    Data science is becoming more and more accessible to more and more people. Amazon launched Amazon Machine Learning last month, Microsoft Azure has been available for some time now and IBM is pushing to commercialize Watson more than ever before. While there is a lot of hype surrounding some of the hot topics in data science, there is a good reason some of the largest firms
  • The Value Proposition. Downtrend signal in growth/value. $IWD [@NautilusCap]

    The Value Proposition. Downtrend signal in growth/value. $IWD
  • Value Investing Research: Simple Methods to Improve the Piotroski F-Score [Alpha Architect]

    In this article, we identify how we can improve the performance of the F-Score and enhance a generic value investing approach. In a 2000 study, "Value Investing: The Use of Historical Financial Statement Information to Separate Winners from Losers" (Journal of Accounting Research, 2000), Joseph Piotroski examined whether an investor could improve his or her investment retur
  • State of Trend Following – August 2014 [Wisdom Trading]

    April 2015: Trend Following DOWN -2.58% YTD: +7.77% Consolidation for the State of Trend Following index in April. Most systems in the index closed underwater, with most of the downwards action happening in the last two days of the month, before which the index was still above the break-even line. Below is the full State of Trend Following report as of last
  • Daily Academic Alpha: Credit Spreads and Stock Returns [Alpha Architect]

    The Term Structure of Credit Spreads and the Cross-Section of Stock Returns We explore the link between credit and equity markets by considering the informational content of the term structure of credit spreads. A shallower credit term structure predicts decreases in default risk, increases in future profitability, as well as favorable earnings surprises, and vice versa
  • Rising Yield Trend $TLT [@NautilusCap]

    Rising Yield Trend $TLT
  • No… Investors Haven’t Underperformed Every Asset Class [EconomPic]

    The following chart has been floating around for more than a year, supposedly showing investors have not only performed poorly, but even worse than almost any asset class. As Richard Bernstein stated: The average investor underperformed nearly every asset class. They could have improved performance by simply buying and holding any asset class other than Asian emerging m

Quantocracy’s Daily Wrap for 05/04/2015

This is a summary of links featured on Quantocracy on Monday, 05/04/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

Quantocracy’s Daily Wrap for 05/03/2015

This is a summary of links featured on Quantocracy on Sunday, 05/03/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Interview with Kevin Davey [Better System Trader]

    Kevin Davey has been developing, analyzing, testing and creating trading strategies for over 25 years, in every futures market from the e-mini S&P to crude oil to corn to cocoa. He placed in the Top 2 of the World Cup Trading Championships from 2005 2007 with the results: 2005 2nd place with a +148% return, 2006 1st with a +107% return, 2007 2nd place with a +112% return. He
  • Recently Discovered Academic Finance Research You Might Have Missed [Alpha Architect]

    Deactivating Active Shares (Frazzini, Friedman and Pomorski) Is Being Different Better? Dispersion and Active Management (The Investors Field Guide) 9 Mistakes Quants Make that Cause Backtests to Lie (The Augmented Trader) Sell in May and Go Away: Still Good Advice for Investor? (Dichtl and Drobetz) Multi-Asset Class Mutual Funds Managers: Can They Time the Mark
  • Market-Making Portfolio & Hedging [Tr8dr]

    With market making we can try to be neutral by skewing prices in such a way as to maintain a neutral position. To the extent that the market can become 1-sided (in momentum) or may have large sized requests (if offering at different sizes), ones portfolio may require explicit hedging. In a live market-making scenario we can determine how we want to hedge on a case-by-cas

Quantocracy’s Daily Wrap for 05/01/2015

This is a summary of links featured on Quantocracy on Friday, 05/01/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • VIX Trading Strategies in April [Volatility Made Simple]

    Weve tested 23 simple strategies for trading VIX ETPs on this blog (separate and unrelated to our own strategy). And while I cant speak for all traders, based on all of my readings both academic and in the blogosphere, the strategies weve tested are broadly representative of how the vast majority of traders are timing these products. Most of these strategies turned in solid performances
  • Could Stocks AND Bonds Be Topping? [Dana Lyons]

    There is always a small but vocal contingent of market pundits calling for a stock market top. In the past few years, there has been a very large but now sheepishly quiet contingent of analysts calling for a top in bonds (i.e., rise in rates). One thing you dont hear too often, however, is a call for a major top in stocks and bonds. Now that would be a double whammy for investors! If you want
  • A Simple Test of the Predictability of Large Daily Changes in SPY [Psych Signal]

    We know market sentiment metrics used as a stand-alone signal – can predict market changes over minutes and sometimes longer. But what about the vital issue of really big day-to-day changes? And what if we add the simplest of daily price dynamics to the daily sentiment metric-based predictive model? Here we present tests of how well daily sentiments predict big market shifts. We take daily
  • Flattish years in SP by end of April $SPY [@NautilusCap]

    Flattish years in SP by end of April $SPY
  • WTI Crude up 25% in a month $USO [@NautilusCap]

    WTI Crude up 25% in a month $USO
  • Ivy Portfolio May Update [Scott’s Investments]

    Scotts Investments provides a daily Ivy Portfolio spreadsheet to track the 10 month moving average signals for two portfolios listed in Mebane Fabers book The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. Faber discusses 5, 10, and 20 security portfolios that have trading signals based on long-term moving averages. The Ivy Portfolio spreadsheet tracks the 5 and
  • Better portfolio building: How system returns correlate under edgeless environments [Mechanical Forex]

    The topic of system return correlations is extremely important as it forms the main pillar of successful portfolio building. Portfolio theory encourages us to put together different systems which are uncorrelated historically, such that our level of expected risk adjusted returns will increase as a result of an increase in compounding efficiency and an increased hedging of drawdown periods between
  • ETFReplay.com Portfolio May Update [Scott’s Investments]

    The ETFReplay.com Portfolio holdings have been updated for April 2015. I previously detailed here and here how an investor can use ETFReplay.com to screen for best performing ETFs based on momentum and volatility. The portfolio begins with a static basket of 14 ETFs. These 14 ETFs are ranked by 6 month total returns (weighted 40%), 3 month total returns (weighted 30%), and 3 month price volatility
  • RUT Iron Condor – Dynamic Exit – 66 DTE – 20 Delta Continued [DTR Trading]

    This post is a continuation of the prior post. In this post we will look at the backtest results for dynamic exits of the 66 days-to-expiration (DTE) Iron Condor (IC), with 20 delta short strikes, with different profit and loss exits as a percentage of the initial credit. Recall that these RUT ICs were all constructed with 20 point wide credit spreads. This is a non-directional options trading str

Quantocracy’s Daily Wrap for 04/28/2015

This is a summary of links featured on Quantocracy on Tuesday, 04/28/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • How Smart are “Smart Beta” ETFs? [Alpha Architect]

    Many consider smart beta to be a revolution in the asset management industry. For example, Bloomberg ran an article, Funds Run by Robots Now Accounts for $400 Billion, which caught our attention. According to this article, Smart beta, is one of the fastest growing segments of ETFs, accounting for nearly 20% of all assets in domestic ETFs as of the end of 2014. The secret sauce of
  • Can you avoid rising rates with high carry assets? [Flirting with Models]

    First: the takeaways Expected return for an asset class is a combination of carry and price appreciation If carry is high enough, it can potentially dwarf price depreciation due to rising rates Higher carry assets (e.g. high yield bonds, MLPs, REITs, bank loans, EM debt, et cetera) have historically had low-to-negative estimated duration profiles High carry assets have a variety of associated risk
  • Is That Back-Test Result Good or Just Lucky? [Adaptrade]

    When developing trading strategies, most systematic traders understand that if you search long enough, you're bound to find something that looks great in back-testing. The question is whether those great results are from a great trading strategy or because the best looking strategy was the one that benefited the most from good luck. A well-known metaphor for this is a roomful of monkeys
  • System building – Data capture [Investment Idiocy]

    A while ago I ran a series of posts on how you would write some python code to systematically trade using the interactive brokers C++ API. Whilst I hope this was helpful it was just a starting point. There are at least two major projects to undertake before one could actually trade. The first is the design of such a system. This is the subject of a book I am writing, which I hope will be published
  • RUT Iron Condor – Dynamic Exit – 66 DTE – 16 Delta [DTR Trading]

    In this post we will look at the backtest results for dynamic exits of the 66 days-to-expiration (DTE) Iron Condor (IC) options strategy, with 16 delta short strikes, with different profit and loss exits. This is a non-directional options trading strategy that seeks to profit from a market that stays within a range between the two short strikes of the Iron Condor. For some background on how the re

Quantocracy’s Daily Wrap for 04/27/2015

This is a summary of links featured on Quantocracy on Monday, 04/27/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Random Notes on Python II [Largecap Trader]

    In continuation of an old post on Python, Ive been playing around with an awesome new library built by P. Morissette simply titled BT. It includes numerous functions for back testing and displaying results & charts for daily strategies and lower frequencies. Heres an example of a simple momentum based tactical asset rotation strategy: PythonEx3 It has a function to weight stocks based on
  • Weekly Commentary A Curated Charcuterie of Links [Flirting with Models]

    Newfound will be hosting its next monthly strategy review session on Thursday, May 14th from 2:00- 2:30PM EST. Were fortunate enough to have a guest panelist joining us: Brett Hammond from MSCI. He will be discussing factor-based investing and MSCIs portfolio construction methodologies that underlying many of the ETFs Newfound utilizes. Well also be discussing how tactical strategies can
  • Alternatives To Matlab [Only VIX]

    Reader Eli asked in the comments "I used to program in Matlab a lot in the past. Now I feel that Python is a better way to go. Any thoughts? Yes, quite a few – however I also hope to hear some ideas from other readers. Matlab is an excellent tool for analytics, and I have been using it for over a decade now. However if I were starting out in quantitative finance today I would probably go with
  • 9 Mistakes Quants Make that Cause Backtests to Lie [Augmented Trader]

    Ive never seen a bad backtest Dimitris Melas, head of research at MSCI. About backtests A backtest is a simulation of a trading strategy used to evaluate how effective the strategy might have been if it were traded historically. Backtestesting is used by hedge funds and other researchers to test strategies before real capital is applied. Backtests are valuable because they enable
  • International Value Investing: Looks Like a Reasonable Bet [Alpha Architect]

    A rich body of literature has shown that value investing, or buying stocks that are cheap based on a variety of valuation metrics, is robust across different markets. For example, Fama and French (1998) highlighted the value premium across world equity markets. The authors find that value portfolios yield higher average returns than growth portfolios in 12 out of the 13 countries analyzed
  • New related paper to #21 – Momentum Effect in Commodities and #22 – Term Structure Effect in Commodities [Quantpedia]

    #21 – Momentum Effect in Commodities #22 – Term Structure Effect in Commodities Authors: Bakshi, Bakshi, Rossi Title: Understanding the Sources of Risk Underlying the Cross-Section of Commodity Returns Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2589057 Abstract: We show that a model featuring an average commodity factor, a carry factor, and a momentum factor is capable of describing
  • Upcoming Courses for 2015 [Augmented Trader]

    New 3-part course Fall 2015 I will be offering a 3 part course, CS 7646: Machine Learning for Trading, online. It is equivalent to the on campus graduate course that I teach at Georgia Tech. The three parts are: Part 1: Manipulating Financial Data in Python (about 4 weeks) Part 2: Computational Investing (about 4 weeks) Part 3: Learning Algorithms for Trading (about 7 weeks) Parts 1
  • How to Avoid Losing 95% in Ford [Jay On The Markets]

    No, were not talking resale value here (in which case losing 95% of your original investment is a distinct possibility). We are talking about stock ownership. In a nutshell, the answer is fairly simple: *It is OK to drive a Ford in late summer into fall. But it is NOT OK (apparently) to own Ford stock during late summer into fall. The History In Figure 1 you see the growth of $1,000 invested in
  • How to Trade the MACD: A High-level Analysis of the MACD Line Feature [System Trader Success]

    Moving Average Convergence Divergence (MACD) is one of the most popular technical indicators used by traders. It is a flexible indicator that can be used for determining the strength and direction of a trend. It has three distinct features and in this first post we are going to do a high-level analysis of one of those features, the MACD Line. We will compare three of the most common MACD Line sett
  • When SOX Falls As NDX Has A Strong Day [Quantifiable Edges]

    One interesting aspect of Fridays action was the discrepancy between the NDX and the SOX. While the NDX rose 1.3%, the SOX declined 1.7% which is very unusual action. Below is an updated study that looks at times the NDX rose by a least 1% while the SOX declined. Six days later 76% of the instances were losers and the average occurrence was nearly a 3% loss. That seems to be a fairly
  • Parsimony [CSS Analytics]

    Note: James Picerno of The Capital Spectator recently did an interesting piece evaluating the Self-Similarity Metric and provides some R code which is valuable for many of our readers. The principle of parsimony relates to being frugal with resources such as money or the use of computing time. It is closely tied to the principles of simplicity, elegance and efficiency. It also complements the phil
  • Lessons from the Flash Crash regulatory fiasco [Mathematical Investor]

    On April 21, 2015, the U.S. Department of Justice announced that it would press criminal charges against Mr. Navinder Singh Sarao, a 36-year-old small-time British day-trader. He is being blamed for nothing less than causing the Flash Crash of May 6, 2010, the second largest point swing (1010.14 points) and the biggest one-day point decline (998.5 points) in the history of the Dow Jones

Quantocracy’s Daily Wrap for 04/26/2015

This is a summary of links featured on Quantocracy on Sunday, 04/26/2015. To see our most recent links, visit the Quant Mashup. Read on readers!

  • Blast Buy & Hold with this simple Bollinger Band strategy [Better System Trader]

    In Episode 4 of the Better System Trader podcast, Nick Radge discusses some trading ideas hes used to create profitable systems. He mentions a Bollinger Band idea which is also published in his book Unholy Grails. Nick says: the strategy that we did test and showed very promising results was an entry using a Bollinger band and an exit using the opposite Bollinger band, but we use 3 standard
  • Academic Finance Research [Alpha Architect]

    Asset Allocation: Is it better to allocate portfolios to factors rather than to assets? (Cocoma, Czasonis, and etal) Tactical Asset Allocation with Market Valuations: Cant even beat the simple 60/40 rule?? (Estrada) More on Smart Beta ETFs: How Smart are Smart Beta ETFs? Analysis of Relative Performance and Factor Timing (Glushkov) Are Smart Beta ETFs a Threat to Active Fund
  • Do Iron Butterflies Need to be Adjusted? [DTR Trading]

    This post will be a quick diversion from the iron condor posts. You may have noticed on my Twitter feed that I have been running backtests on iron butterflies, straddles, and strangles, using a range of entry and exit criteria. Today we will take a look at some statistics of a medium term, 43 days to expiration (DTE), iron butterfly on the SPX, to see how different wing widths and exits impact the
  • What Works Best? Update [CXO Advisory]

    Weve updated What Works Best? to incorporate some recent research summaries and adjust interpretation of the body of research.