“My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: ‘How do I keep from losing everything?’ If you use the 200-day moving average rule, then you get out. You play

The Ivy Portfolio spreadsheet track the 10 month moving average signals for two portfolios listed in Mebane Faber’s 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

Random portfolios deliver alpha relative to a buy-and-hold position in the S&P 500 index – even after allowing for trading costs. Random portfolios will serve as our benchmark for our future quantitative equity models. The evaluation of quantitative equity portfolios typically involves a

The week between Christmas and New Year’s is often a quiet one that is not prone to large-move days. So strong rallies like we saw on Tuesday are a bit unusual this time of year. I looked back to 1970 to see what has followed other times when SPX rose over 1% on a day between Christmas and New

Bill, Ernie and Sam—three lifelong value investors—met in a bar on November 30th, 2015. Bill was despondent. He’d underperformed the market by -47% over the past 10-years and was questioning his very belief in value. Ernie was happier. He’d done poorly in 2015, but over the last ten years

The efficient market hypothesis suggests that stock prices are always “right” in the sense that stock prices reflect all available information. Of course, during tax season, fundamentals go out the window: I’m selling my losers, and letting my winners ride! And I’m not the only investor

I provide a novel risk-based explanation for the profitability of momentum strategies. I show that the past winners and the past losers are differently exposed to the upside and downside market risks. Winners systematically have higher relative downside market betas and lower relative upside market

Having been a full-time academic financial economist in a former life (still dabble, when able), I became accustomed to my annual pilgrimage to the annual American Finance Association (AFA) meeting. For the uninitiated, the AFA annual meeting is a gathering of all the major brainpower in academic

In the previous installment in this series of analyzing a globally diversified portfolio we reviewed the results after adding a momentum-based risk-management system. The test suggested that a tactical overlay can be productive… maybe, depending on the details. Let’s continue to investigate our

To date in our time series analysis posts we have considered linear time series models including ARMA, ARIMA as well as the GARCH model for conditional heteroskedasticity. In this article we are going to consider the theoretical basis of state space models, the primary benefit of which is that their

This commentary is available for download here. There is an adage on Wall Street that comes around every January. And every January, we debunk it. In As Goes January, So Goes the Year, we remind readers that while the performance of markets in January will, by definition, influence the total return

I’ve recently been experimenting with Genotick, which is open-source java software that attempts to discover mechanical trading systems through the use of machine learning. You can run it on just about any Mac/Windows/Linux system (although you may have additional hurdles to get java8 working at

J.B. Heaton, Nick Polson and J.H. Witte recently authored a nice short paper—it’s all of four pages—entitled “Why Indexing Works.” In it, the authors developed a simple stock selection model to explain why active equity fund managers tend to underperform their benchmark index. While most

In this episode we’re discussing the results of a quantitative study on stop losses completed by Cesar Alvarez of Alvarez Quant Trading. Cesar was also a guest of the show way back in Episode 3. Cesar was director of research for Connors Research for almost 9 years, developing quantitative trading

The best quant mashup links for the week ending Saturday, 12/26 as voted by our readers. Build Better Strategies! Part 2: Model-Based Systems [Financial Hacker] Returns don’t mean revert, fundamentals do [Flirting with Models] Testing for mean reversion with Python & developing simple VIX

Measuring Tail Risks at High Frequency

Pairwise Correlations

Trading systems come in two flavors: model-based and data-mining. This article deals with model based strategies. The algorithms are often astoundingly simple, but properly developing them has its difficulties and pitfalls (otherwise anyone would be doing it). Even a significant market inefficiency

VBA and Quant finance This article is actually a first part of an introductory course to VBA coding, given at Solvay School of Economics in Feb. 2014. The Excel sheet and VBA swap pricing code are attached. Visual Basic for Applications (VBA) is not ” trendy”, properly speaking, in the financial

When a prophet speaketh, … if the thing follow not, nor come to pass, … the prophet hath spoken it presumptuously: thou shalt not be afraid of him.” [Deuteronomy 18:22]. In a December 2014 Math Investor blog, we assessed how 2014 market prophets had fared (answer: not very well). Thus with the

Does the New Year’s Day holiday, a time of replanning and income tax positioning, systematically affect investors in a way that translates into U.S. stock market returns? To investigate, we analyze the historical behavior of the S&P 500 Index during the five trading days before and the five

As per request, I’m including the AmiBroker code for the “30% up/down last quarter in the Russell 3000 index” indicator. I REALLY need to come up with a better name for it than that. How about the Haines Breadth Indicator? No, that’s stupid. Magic Matt’s Mystical Meter? Uh…sure. It’s a

This week I had the great pleasure of speaking with Dr Ernest Chan, from Toronto (Canada). While many traders in the quantitative arena will already be familiar with Ernie, here's a brief intro… You could say, Ernie had somewhat of an unconventional introduction to trading - he started out on

I've been posting and updating the "Twas 3 Nights Before Christmas" study on the blog here since 2008. The study kicked in at the close yesterday close. This year I will again show the Nasdaq version of the study. While all the major indices have performed well during this period, the

Value, Size, Momentum and the Average Correlation of Stock Returns

The Factor Structure of Time-Varying Discount Rates

Option-Based Estimation of the Price of Co-Skewness and Co-Kurtosis Risk

Let’s wrap this up! We established a baseline using a moving-average system on the price of SPY to determine when we enter and exit the market. Then we tested a variety of breadth indicators, using the diffusion calculation and requiring entries and exits to have ten days above or below the

Many investors today are confronting what could be considered a “perfect storm” that is creating strong head winds against the pursuit of higher expected returns. So far, we have discussed the main factors currently working against investors, as well as some steps they might consider taking to

This is the fifth article in a series looking at the backtest results of selling at-the-money (ATM) options straddles on the Russell 2000 index (RUT). For background on the setup for the backtests, as well as the nomenclature used in the tables below, please see the introductory article for this

The rise of smart beta–or more broadly, factor investing–has coincided with a 6 year period of zero interest rates. During this period, factors have been particularly ineffective relative to longer term results. Using publicly-available data (Ken French) we can explore the recent results for the

Through a combination of quackery, charlatanism, and inadequate utilisation of mathematics, callers for US recession in 2016 are embarrassing themselves. Again. The most prominent reason for recession calling may well be the Institute of Supply Management’s Manufacturing Purchasing Manager Index.

How do you rate an NBA team across a decade of play? One method is “Elo,” a simple measure of strength calculated by game-by-game results (Source: Nate Silver’s FiveThirtyEight). A description of Elo is below: Elo ratings have a simple formula; the only inputs are the final score of each game,

This is part 5 of a multi-part series examining the use of market breadth indicators to judge the state of the market. For an overview of what I’m doing, you’d best start here so you can catch up: PART 1…CLICK HERE. And oh yeah, we finally have an indicator that beats our baseline! Just

While prior 5-year returns for the S&P 500 have been spectacular, prior 10-year returns are still muted. Does this mean the bull market still has room to run? Prior returns, however, are not a great predictor of future returns. Fundamentals, not returns, tend to be mean-reverting. Current

Some time during the 18th century the biologist and geologist Louis Agassiz said: “Every great scientific truth goes through three stages. First, people say it conflicts with the Bible. Next they say it has been discovered before. Lastly they say they always believed it”. Nowadays I am not sure

The best quant mashup links for the two weeks ending Saturday, 12/19 as voted by our readers: Using the LASSO to Forecast Returns [Alex Chinco] pysystemtrade [Investment Idiocy] Why Does Dual Momentum Outperform? [Dual Momentum] Why doesn’t the choice of performance measure matter?

Welcome to Part 4 of this series. We’re still trying to find a market breadth indicator that gives a better health assessment than using a simple moving average on SPY. For a description of what the heck I’m doing, please go back and read the first post (and the subsequent ones too): Using

If you had invested $100,000 in Altria Group ($MO) on March 31st, 1980, the position today, with dividends reinvested, would be worth $93.6MM–a 21.0% annualized return. If you had invested the same amount in Berkshire Hathaway ($BRK-A), the position would be worth $77.0MM–a 20.4% annualized

Does the Christmas holiday, a time of putative good will toward all, give U.S. stock investors a sense of optimism that translates into stock returns? To investigate, we analyze the historical behavior of the S&P 500 Index during the five trading days before and the five trading days after the

There are already many python packages where you can back test trading strategies. Some of them also include a framework for automatic execution and complete position management. I can't give an exhaustive list but I'll pick out: - Quantopian's zipline - BT - pythalesians -

If you’re just popping in during the middle of this series, I suggest that you go read the intro post first, so you know what the heck I’m talking about. I’ll wait here while you check it out: Using Market Breadth to Gauge Market Health (part 1) Let’s next take a look at a short-term breadth

Those who have read my momentum research papers, book, and this blog should know that simple dual momentum has handily and consistently outperformed buy-and-hold. The following chart shows the 10- year rolling excess return of our popular Global Equities Momentum (GEM) dual momentum model compared

Chief financial officers are responsible for managing the financial reporting process. We test whether the quality of a firm’s financial reports is a function of the effort expended by the CFO. Using golfing records to measure leisure consumption, we first show that CFOs consume more leisure when

Fed announcing Wednesday that they will begin raising rates for the 1st time in 11 years. Since 1990 there have only been 4 other cycles of rate hikes. I decided to measure SPX performance from the start of those cycles. I found that one month later the stock market was trading lower every time. But

The recent piece on the dangers of backtesting has attracted an unusual amount of attention for a piece on this blog. I'd like to thank everyone who read and shared the piece, and also those who offered up commentary on it. To be clear, my intent in presenting the Daily Momentum example was not

We contrast the time-series and cross-sectional performance of three popular investment strategies: carry, momentum and value. While considerable research has examined the performance of these strategies in either a directional or cross-asset settings, we offer some insights on the market conditions

It is impossible to obtain pure factor exposure. All stocks are exposed in some way to all factors. Further, the factors are all inter-related so by trying to obtain exposure to one factor in particular you will tend to get a certain type of exposure to the other factors. Very broadly • Value has

A reader recently asked how to do equity curve correlation. For detailed information on correlation you can read Correlation and dependence or for simpler explanation read Correlation at Math is Fun. For steps on how to do this in Excel, which is where of course I did it, read Correlation at Excel

This is the fourth article in a series looking at the backtest results of selling at-the-money (ATM) options straddles on the Russell 2000 index (RUT). For background on the setup for the backtests, as well as the nomenclature used in the tables below, please see the introductory article for this