Off Topic

Can You Time the Market Without Crying?

We’ve all seen pictures like this one from Putnam showing how bad of an idea it is to miss the 10 best days in the stock market

Missing the Best DaysChart Courtesy: Putnam

But we read an interesting post on trying to time trading systems (that’s like timing market timing) that seemed to approach this in a bit more logical way. You see – it doesn’t make much sense to talk about missing the 10, or 20, or 40 best single days in the stock market. Most market timers aren’t trying to avoid a single bad day,  and get back in the next day. Most are looking at things like Price to Earnings ratios and the rest are trying to avoid bad periods… not just bad days. Plus, nobody is that unlucky trying to time the market that they miss just the 10 best days over a few decades. On the flip-side, nobody is that lucky that they would magically miss the worst market days over 10 to 20 years, only to get right back in the next day.

It makes much more sense to us to talk about what missing the best streaks of days looks like. The best 10 and 30 days periods, for instance. That would be a lot more interesting; to see how bad/good you would have been if you picked the exact wrong/right time.

Here’s what we found:

(Note: These figures do not represent actual trading, and were not taken from real experiences)

Missing the Best Trading Days

Missing the Worst Trading Days(Disclaimer: Past performance is not necessarily indicative of future results)
(Note: The figures and charts above are an example and do not represent actual trading)

In our opinion, the better argument for not trying to time would go something like this:

Trying to time the market?

  • If you’re incredibly smart, or lucky, or both – missing the worst 10 day streak would save you 549%
  • If you’re incredibly dumb, unlucky, or both – missing the best 10 day streak would cost you 212%
  • If you’re somewhere in between smart and dumb and have average luck – you’ll likely not miss anything… with missing the average 10 day streak resulting in 4%

We’re not sure if this supports timing or not – but it sure seems a better way to talk about it, rather than the more prevalent narrative about the big danger of missing the best 10 days in the stock market – like they come one right after the other or you’re the unluckiest person on the planet.  The whole thing is kind of silly anyway – as it is backwards looking, and would need to be completely thrown out the window if the next 30 years were the negative image of the past 30 years, with stocks returning –70% over the span. If that happens, then timing would do no good, again – it would be better to not be involved at all…



Rise of the Robo Advisors?

The Economist CoverForgive us for stealing from the cover of the Economist, but given the topic it seems fitting. Ever since the major technological advancements of the 20th century, there’s been a growing fear that soon enough robots will control the world (cue the Terminator franchise). Fast forward to today, and this fear has creeped into the financial advisor space of all places, with articles using  words and phrases like “afraid” & “risk irrelevancy” to display the attitudes and dangers all advisors face if they don’t adapt to the shifting mentality when it comes to investing. What are we talking about? And what is a robo-advisor anyway?  Why are people supposedly fearing it?

Who are the Robo-Advisors?

Just like Amazon ($AMZN) ruined Borders and the local bookstores, Netflix ($NFLX) killed Blockbuster, Facebook ($FB)  killed talking to your friends, and Tesla ($TSLA) is trying to disrupt the big auto-makers; the whole idea behind Robo-Advisors is to disrupt the financial advisor space with new technology and lower costs:  mainly algorithms instead of advisors; websites instead of branch offices, and automated text messages instead of hour long meetings. A few leaders have emerged so far in the space, with names like Betterment, Wealthfront, and FutureAdvisor, and a quick view of their websites will show essentially the same message:  ditch your father’s golfing buddy and invest like it’s the 21st century, with easy, intuitive tools to set things up and automated processes after that so you don’t have to worry about it. 

Why is Everyone Talking about them Now?

It’s the financial equivalent of booking an Uber on your phone versus standing in the cab line at the hotel. And it’s gone beyond the idea stage to real money. Wealthfront launched in December of 2011 and in those 30 months, they have since grown to $1 Billion in AUM, which is roughly an average growth of 33.3m a month. Betterment is doing well too, with $502 mm in assets under management. As for FutureAdvisor, they now have over $118mm AUM, with only 18 employees.  And the Venture Capital folks are falling all over each other to get in on the game wondering if this is the next Twitter or Facebook or whatever, pumping over a quarter of a billion into the space, and $95 million in just a few weeks earlier this year.

Bo Lu, the CEO of Future Advisor had this to say about the size of the opportunity

[Read more...]

About that Volatility = Complacency Claim…

Here’s how the usual reporting on low volatility goes…

There’s Low Volatility because the VIX is low, and the VIX being low reflects investors paying less for future downside protection, and paying less for downside protection means investors are less concerned (or aware) of the possibility of downside… so low volatility means these investors are becoming more “complacent”.  What exactly does complacent mean, we looked it up, via

“pleased, especially with oneself or one’s merits, advantages, situation, etc., often without
awareness of some potential danger or defect; self-satisfied.”

It’s kind of like a person foregoing hurricane insurance because there hasn’t been one in a while. Their recent good fortune of no hurricanes blowing their house down has made them complacent about the possibility of future hurricanes.

The structure of the VIX leads to this low volatility = complacency argument. The Chicago Board Options Exchange’s Market Volatility Index, or the VIX, measures the implied volatility of S&P 500 index, representing investors’ expectations of volatility in the benchmark equities index over the next 30 days.  Higher VIX values indicate anticipation of higher stock market volatility while lower VIX values indicate the expectation for lower stock market volatility. With stock markets tending to ‘take the stairs up, and the elevator down’ as the old saying goes, higher volatility is associated with lower prices most of the time. So, if investors think equities are going lower, they think it will be accompanied by increased volatility, and therefore will be willing to price the VIX higher.

So….we’ll concede that a Low Vix can represent a certain amount of complacency and lack of awareness of possible downside (or upside spikes for that matter) among investors in equities.

But does it follow that low volatility in say, Bonds, means that bond investors are becoming more complacent. While this is mostly semantics and likely only of interest to the most nerdy among you, does it follow that low volatility in Bonds as measured by tight ranges means there is complacency in that market?  We sort of think no. You see, volatility in nearly everywhere but the VIX is measured not by the prices of options to extrapolate the expected volatility over the next 30 days – but instead by the observed volatility over the most recent period, be it 30 days or 100 or the past year.

And that’s the rub… when we say that there’s low volatility in a market like bonds or the Euro Currency because the ranges have contracted, and that means there’s complacency (like we did in our “Complacency Everywhere” piece last week), we’re missing that the tighter ranges are what happened, versus the VIX reading being a measure of what investors believe will happen.  Now, of course, investors being humans – they often project what just happened onto what they think will happen, so there is a high correlation between the observed volatility and expected volatility.

But you can see intuitively that these aren’t the same thing. The observed volatility being low simply means investors were not faced with any market moving information or outside forces over the observed period. It doesn’t necessarily mean those investors are becoming complacent, i.e. – pricing in low volatility expectations moving forward. Luckily, the CBOE came out with some VIX-index like products a while back which allow us to test out this observed versus implied phenomenon. You can see from the charts that while observed volatility is at multi-year lows, the expected volatility is actually at multi-month highs.


Observed volatility = the tightest 10 Yr Treasury Yield 3 month range in 35 years

Expected Volatity = CBOE/CBOT 10-year U.S. Treasury Note Volatility Index - VXTYN (below)

Bonds Vix(Disclaimer: Past performance is not necessarily indicative of future results)

Euro Currency:

Observed volatility = the tightest consecutive monthly ranges in the Euro since inception

Expected Volatility = CBOE EuroCurrency ETP Volatility Index - EVZ (below)

Eurocurrency Vix(Disclaimer: Past performance is not necessarily indicative of future results)

So next time someone (like us) tells you investors are complacent because there’s low volatility – double check their inputs. Are they saying low volatility using the expected volatility of that market looking forward, or the observed volatility looking backwards?  We couldn’t agree more that tighter ranges and a low VIX portend a more volatile climate coming up (not a lower one), but the slight problem in the low volatility = complacency argument didn’t sit so well with us over the weekend… we feel better now for having gotten it off our chest.

Who got into the Crayon Box over at Bloomberg?

A little more than a week has gone by, and we haven’t heard anyone discuss Bloomberg’s shift in the presentation of their charts/graphics (Here and here are just two examples). We’re not sure if we like or really hate these new Bloomberg graphics, but what is going on – is there a demand for this? What do you think?

New Picture(Disclaimer: past performance is not necessarily indicative of future results)
Charts Courtesy: Bloomberg

New Picture (1)(Disclaimer: past performance is not necessarily indicative of future results)
Charts Courtesy: Bloomberg

New Picture (2)

New Picture (3)

New Picture (4)

The Best of the Internet This Week

  • Nominees for the CME Group / Barclayhedge Managed Futures Pinnacle Awards – (Managed Futures Pinnacle Awards)
  • What you missed in the world of Managed Futures this week – (Attain Capital)
  • The Apotheosis of David Tepper – (Reformed Broker)
  • The Trade of the Century: When George Soros Broke the British Pound – (Priceonomics)
  • The Phil Ivey controversy: Searching for an ethical line in gambling – (Sporting News)
  • 6 Unscientific Ways to Tell the Market is at the Top – (Attain Capital)
  • Millennials are becoming financial Neanderthals – (The Week)
  • Good Volatility Vs Bad Volatility – (Value Walk)

Just for Fun:

  • The Slow Death of American Entrepreneurship – (Five Thirty Eight)
  • John Oliver & Bill Nye School Climate Change Skeptics On ‘Last Week Tonight’ – (Huffington Post)
  • Name the best, baddest extinct dinosaur of all time (Stand Up) – (Dan Telfer)
  • FCC approves plan to consider paid priority on Internet – (Washington Post)
  • Rare Footage of FDR Walking Donated to PA – (The Associated Press)
  • Why Jill Abramson Was Fired – (The New Yorker)
  • Tennessee promises free college to all high school grads – (CBS News)

Be Cautious Counting on Correlations

Great site pointed out by @reformedbroker over the weekend… looking at ‘spurious correlations’

Here’s a few of our favorites:

Divorce Correlation

Number of people who died by becoming tangled in their Bedsheets
correlation with
Total revenue generated by skiing facilities (US)

= 0.96

Number of people who died falling off a Cliff
correlation with
Number of lawyers in Ohio

= -0.85

These stats would have us believe that the more margarine people eat, the more people get divorced in Maine; that the less people who die getting tangled in their sheets means the lower the national ski industry revenue is, and that every time a person goes off a cliff – there’s one less lawyer in Ohio (maybe it’s the lawyers jumping off the cliffs).

But surely those aren’t the case, and assuming such would be making the classic error of confusing causation with correlation. What’s more, we would argue these things aren’t even really correlated, despite the statistics. We would bet that going back 100 years would show correlations of closer to 0.00 for all of the above, because we know intuitively that margarine consumption and divorce have nothing to do with one another.

Which leads us to the cautionary correlation corollary, which is to be extra careful when trusting correlations, especially ones on annual data with few data points as appears to be the norm on the spurious site. The investment world is filled with classic examples such as stock returns being correlated with women’s skirt lengths; but the real lesson here may be a but more nuanced.

The real lesson for us is twofold – 1. Anything can become correlated over a set period of time. Anything. Just peek back at 2008 for a real world example when stocks and bonds, stocks and gold, stocks and commodities, stocks and hedge funds, and even stocks and money market funds moved towards  a correlation of 1.00 (went down at same time and near the same magnitude).

2. Do a fundamental double-check of your portfolio before blindly trusting the correlation metrics you’ve come up with in analyzing the components. You may be a professional trader and found your Cocoa trading model has zero correlation to your Sugar trading model, and look to lever them both up at the same time knowing they aren’t likely to lose at the same time…. And that is right when you’ll find just how non spurious two related commodities being traded by two models developed by the same brain (yours). Same goes for you, Mr. Investor – that credit arbitrage hedge fund throwing off income currently with a zero correlation to the Nasdaq may become very non-spurious also, if credit tightening causes losses in stocks and the hedge fund.

Now, if we could just get the daily number of readers of our blog to correlate with the moves in the Japanese Yen, we would be onto something!

6 Unscientific Ways to Tell the Market is at the Top

It’s safe to say that many investors have lost money trying to predict the turn of a market, or vice versa; believing in the bull as it drops 25%. Once the aftermath is over, it always seems like the warning signs were glaring in front of our eyes the whole time, and you ask yourself why you didn’t get out in time. We’re not big on giving our two cents about what’s happening in the stock market world. It’s just not us. But instead of telling you what is, or what isn’t, we figured we’d show you some indicators that could potentially be warning signs and let you decide for yourself. So here are the “6 could be warning signs,” that the market is at the top.

1. All Time Highs

The most obvious, is of course, the market is literally… at the top. The S&P 500 and DJIA just hit new intra day all time highs, while the Russell and Nasdaq have taken a beating the past month. Which is the true indicator? Is this just the correction phase for the Russell and Nasdaq while the S&P continues to climb, or is the S&P going to eventually follow the path of the smaller indices?  We’ve learned that just because something is at an all time high doesn’t necessarily mean it’s going to turn around. Cast in point, the stock market the past couple of months. But where does the run stop?

2. New Record for Most Expensive Home

Is your home an investment or not? It’s been a hot debate on the blogs the past couple of weeks… but the extremely wealthy sure think so. Over the past couple of months, three homes have sold in the U.S. for more than $100 Million (which is a new record by the way). We discussed earlier how the housing market is only doing well for top-tier sales, compared to the rest of the market. Case in point, this home below set the world record for most expensive home sale at $147 Million. This isn’t to say that all expensive homes are selling, Billionaire Steve Cohan can’t seem to sell his four-bedroom pad in Manhattan.

Home Sale

3. Alibaba IPO

The tech IPO announcements continue, despite recent struggles, and this one could be the biggest of them all. For those of you who haven’t heard, Alibaba is the world version of Amazon, except Alibaba is much, much bigger via Forbes; setting the stage for what could be the largest IPO offering in history.

“Though it is often compared to Amazon, the company has either full or partial ownership of businesses that compare favorably to U.S. businesses like Ebay, PayPal, Twitter and Hulu. In 2013, Ailbaba processed 11.3 billion orders worth $248 billion, well ahead of Amazon and Ebay combined, with its sales accounting for 84% of China’s online shopping.”

But it’s not just the IPO news that’s catching people’s attention. Back when people didn’t know the name Alibaba, Yahoo! bought up a portion of the company, and currently owns 24%. It’s the latest strategy of which company owns the next for leverage. It’s appears that everyone’s trying to get their money’s worth while the goings good before it’s over. Is Yahoo! going to cash out before they think the bubble bursts?


4.  Apple, Beats, and Dr. Dre (First Rap Billionaire?)

Speaking of large purchases, just last week, Apple decided to follow in line with other large purchases of other tech companies by purchasing Dr. Dre’s iconic headphones “Beats,” for more than $3 Billion. This deal may or may not create the world’s first rap billionaire (depending on Dre’s stake in the company). Either way, we congratulate Dre’s success on cashing in on the tech bubble while he can. Add this to Facebook buying Whatsapp, Yahoo! buying Tumblr, and so on.


5. Animated Candies Take Over Wall St. 

King Digital Entertainment, The company  behind the game “Candy Crush” went public earlier this year, and is now down almost 14% since it’s IPO date. We’ll leave the commentary for this example to someone else.

“Remember this moment boys, for as long as you live, for it is the exact moment in time when Wall St said “enough is enough.” The moment animated candies stepped onto the NYSE to mingle with the cynical alcoholics on the floor, all hope for extending the bubble died.

This is the tipping point in stock market history. It must be documented here– for the children– so that future generations learn from our mishaps.”

King Candy Crush


6. Four Seasons Around the World Tour

This one is a little bit out there, but we couldn’t resist.

Do you have $119,000 lying around that you want to spend on a vacation? Perfect! Jump aboard a one month, 9 city private tour around the world on a Four Seasons private jet.  Just imagine the endless possibilities of what you could use the money for? Maybe, help fund a start up company?

Four SeasonsSo what do you think? Are these all examples of the recovered economy? Is it the direct effect of people/companies having more free cash to spend? Or are these the warning signs that the pundits say we should have noticed in a couple of months?