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

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

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

Which Trend Is Your Friend? (via @carlfischer101)

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

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,

We’ve 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.

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

Rob Seawright of Above the Market recently posted an article broadly skewering tactical asset allocation (TAA) strategies. He cites the failure of market gurus to pick market turns (from a CXO analysis we've discussed in the past), and a Morningstar study showing that TAA has under-performed

Corporate Lobbying and Firm Performance Corporate lobbying activities are designed to influence legislators, regulators and courts, presumably to encourage favorable policies and/or outcomes. In dollar terms, corporate lobbying expenditures are typically one or even two orders of magnitude larger

#6 - Volatility Effect in Stocks - Long-Short Version #7 - Volatility Effect in Stocks - Long-Only Version #20 - Volatility Risk Premium Effect Authors: Ilmanen Title: Do Financial Markets Reward Buying or Selling Insurance and Lottery Tickets? Link:

China up 50% in 3 months. Mixed EM historical record after similar momentum $FXI

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

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

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

If it feels like the stock market hasn’t moved in a few days, you’re not imagining things. With the long weekend approaching, it seems as though Wall Streeters (or their robots) packed up and departed for the mythological “Hamptons” days ago. As it pertains to the small caps, as represented

I am back from the Australian Technical Analysis Association meeting in the Gold Coast, Australia. I had a great time meeting readers of the blog and other traders. Lots of good presentations. My favorites include those by Alan Clement and Andrew Gibbs, which provided me with new research ideas.

Narrowest SPX 6 month range in 10 years $SPX $SPY

Week after Memorial Day holiday pretty bullish $SPX $SPY

Just because I’m ignorant doesn’t mean I won’t try things. Feel free to correct any ignorance that follows. More than anything I would like to feature the new htmlwidget visNetwork. I thought the example from Minimum Spanning Trees in R applied to currency data (similar to this research paper

Need something to listen to on your Memorial Day weekend car trip? Can’t bear to be without the markets for 3 days? Check Andrew Swanscott’s interview with me at his great new site, Better System Trader. It was published just a few days ago and joins a growing list of excellent podcasts that

Today, we wrap up our mini-series on divergences among the Dow Jones indices. In previous installments, we learned that large negative divergences on the part of the Dow Jones Transportation Average (DJT) versus the Dow Jones Industrial Average (DJIA) were largely overrated. Of course, that is

#237 - Dispersion Trading Authors: Deng Title: Volatility Dispersion Trading Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1156620 Abstract: This papers studies an options trading strategy known as dispersion strategy to investigate the apparent risk premium for bearing correlation risk

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

How risky is it to buy an individual stock? This is a question investors should ask themselves when deciding to buy a single stock. However, many investors tend to get caught up in the story about why company XYZ is going to double over the next year. As an educated investor, it makes sense to know

See Jay’s recent post: One More Plunge for Crude Oil? OK, my last article (Will Natural Gas Break Wind in June?) did sound a little apocalyptic regarding the prospects for natural gas in June. But maybe that did not present the full picture. While that previous article did detail a bearish

Put/Call ratios pretty low... $SPX $SPY

This post looks at a standard (STD) one-lot iron condor on the S&P 500 Index (SPX), initiated at 52 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

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

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

The Europe Catch-Up Trade... $FEZ

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

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 Fed’s role in

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

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 Fund’s R2 as Predictor of Performance,” which was published in the March 2013 issue of The Review of

This is part 2 of our series (or mini-series…TBD) 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

See Jay’s 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 you’d better brace yourself. Because a “sure-fire, can’t miss, you can’t lose” thing is on the horizon in natural gas. Well

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

Divergences are one of the most oft-cited arguments in calling tops. They are also perhaps the least accurate. That’s 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,

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

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

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

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

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

A recent academic paper, Equal or Value Weighting? Implications for Asset-Pricing Tests, highlights two methods of weighting: Equal-weight and Value weight. As the paper states: With monthly rebalancing, an equal-weighted portfolio outperforms a value-weighted portfolio in terms of total mean

This may be one of the simplest strategies I've ever presented on this blog, but nevertheless, it works, for some definition of "works". Here's the strategy: take five global market ETFs (MDY, ILF, FEZ, EEM, and EPP), along with a treasury ETF (TLT), and every month, fully invest

Trading futures has one fairly substantial complication compared to many other assets. You can't just buy 'the CME Gold future'. There is no such thing. You need to select which delivery date future you are trading. Do you want to trade June 2015, July, August....? Once you've

If you're a long-term reader of my articles, or a subscriber to the newsletter, you will know that I am not a great supporter of a stop-loss system. This is mainly been because some testing we did came to the conclusion that a stop-loss strategy leads to lower returns even though it did reduce

During my series on dynamic exits of iron condors, I received several requests for an expansion of these backtests. Specifically, people asked if I could run the tests with larger loss thresholds. I thought this was a good idea. I've decided to postpone the series on the Strangle options

There was a period not so long ago on a planet not so far when I lost all concept of value. I had lived in many countries in as many months and lost track of what anything was worth. Euros, USD, SGD, IDR and AUD became indistinguishable units of exchange, a means to an end, I handed over a fist of