Capitalogix

Diversification Ideas for this Market

David Stendahl sent me some stats that point to some diversification opportunities. 

Does the following chart look like a bunch of scribbles?  Good; it shows the diversified returns of the S&P 500 Index, Gold, Euro, 10-Year Note, Corn and Crude.

 

 

Keep these markets in mind as trading options that often offer performance not highly correlated with the S&P 500 Index.

What follows are a similar set of comments for various markets.

 

Gold

Over the past 14 yrs, the top 20 winning mos. in Gold produced an avg return of 8.3% … The same mos for the S&P 500 returned 0.6%.

Since 1997 Gold generated a total return of 165.3% based on its top 20 grossing mos. … The S&P 500 index returned 12.5% for the same mos.

Gold generated an avg return of 8.3%/mo based on its top 20 grossing mos. since 1997 … Returns the next month were up on avg 1.3%.

FYI: Gold generated an avg return of 0.6%/mo based on its top 20 grossing mos. since 1997 … Returns the next month were up on avg 1.3%.

14 year perspective … top 3 monthly returns for Gold 13.4%, 13.2% & 12.3% vs. those for the S&P 500 index 11%, 10.1% & 9.3%.

The short advantage ... top 3 negative monthly returns for Gold -17.9%, -11.4% & -9.2% vs. those for the S&P 500 index -18.1%, -12.2% & -11.5%.

 

Crude Oil

Over the past 14 yrs, the top 20 winning mos. in Crude Oil produced an avg return of 9% … The same mos for the S&P 500 returned 1.8%.

Since 1997 Crude Oil generated a total return of 179.2% based on its top 20 grossing mos. … The S&P 500 index returned 35.3% for the same mos.

Crude Oil generated an avg return of 9%/mo based on its top 20 grossing mos. since 1997 … Returns the next month were up on avg 1.6%.

FYI: Crude Oil generated an avg return of 1.8%/mo based on its top 20 grossing mos. since 1997 … Returns the next month were up on avg 1.6%.

14 year perspective … top 3 monthly returns for Crude Oil 19.2%, 17.3% & 11.6% vs. those for the S&P 500 index 11%, 10.1% & 9.3%.

The short advantage ... top 3 negative monthly returns for Crude Oil -23.3%, -15.1% & -13.6% vs. those for the S&P 500 index -18.1%, -12.2% & -11.5%.

 

Corn

Over the past 14 yrs, the top 20 winning mos. in Corn produced an avg return of 10.7% … the same mos for the S&P 500 returned 1.9%.

Since 1997 Corn generated a total return of 214.7% based on its top 20 grossing mos. … the S&P 500 index returned 37.7% for the same mos.

 

Euro

Over the past 14 yrs, the top 20 winning mos. in Euro produced an avg return of 5.5% … The same mos for the S&P 500 returned 2.4%.

Since 1997 Euro generated a total return of 109.2% based on its top 20 grossing mos. … The S&P 500 index returned 49% for the same mos.

 

Ten Year

Over the past 14 yrs, the top 20 winning mos. in 10 Yr. T-Note produced an avg return of 2.1% … The same mos for the S&P 500 returned -1.5%.

Since 1997 10 Yr. T-Note generated a total return of 42.3% based on its top 20 grossing mos. … The S&P 500 index returned -29.8% for the same mos.

10 Yr. T-Note generated an avg return of 2.1%/mo based on its top 20 grossing mos. since 1997 … Returns the next month were up on avg 0.1%.

FYI: 10 Yr. T-Note generated an avg return of -1.5%/mo based on its top 20 grossing mos. Since 1997 … returns the next month were up on avg 0.1%.

14 year perspective … top 3 monthly returns for 10 Yr. T-Note 5%, 2.7% & 2.4% vs. those for the S&P 500 index 11%, 10.1% & 9.3%.

The short advantage ... top 3 negative monthly returns for 10 Yr. T-Note -3.7%, -2.6% & -2.5% vs. those for the S&P 500 index -18.1%, -12.2% & -11.5%.

 

What To Do If the S&P 500 Index Starts to Out-Perform Asian Markets

There is a slight, but potentially growing, disconnect between the S&P 500 Index and the Asian stock markets (specifically the Hang Seng).

On Friday the Hang Seng lost 1%. Moreover, looking at the recent price performance action … on a 20 day basis, the Hang Seng acting very different than other world markets.

 

Signal Financial Group just updated their seasonal chart series for the Hang Seng Index.  It indicates that we could be at a turning point, with little upside expected based on historical patterns.

 

 

A Little Risk/Reward Exercise in Portfolio Diversification.

If the S&P continues to the upside … the Hang Seng may not follow.  Thus, over the next few weeks, some traders may look at a potential Long S&P and Short Hang Seng play.

Just as an example, here is a quick look at a portfolio study covering 6 weeks, comparing the performance of a portfolio based solely on the S&P 500 Index versus a portfolio that is long the S&P (using 90% of capital) and short the Hang Seng (with 10% of capital).  

 

Portfolio Allocation:

Equity Portfolio:		100% Long S&P 500 Index
Mixed Portfolio:		90% Long S&P 500 Index and 10% Short Hang Seng

 

The chart below provides a basic analysis, identifying the differences between the two portfolios. The chart is divided into three sections: return comparison, risk comparison and portfolio change. The first section shows the percent return figures for the portfolios over a recent six week period. The second section focuses on risk, which is defined as standard deviation of return, over the same six week time period. The final section shows the net percentage change to the portfolio's performance based on the small 10% allocation to Hang Seng.

 

The diversification helps the risk/reward ratio in the study.  That looks like something to watch for in the coming weeks.  Hope it helps.

 

Related articles

• Watch the Hang Seng (ritholtz.com)
• Hang Seng Soars On Chinese Bank Investments (businessinsider.com)
• Asia update: It's getting grimmer (ftalphaville.ft.com)

TED Talk: How Algorithms Shape Our World

Booting up SkyNet.

Kevin Slavin argues that we're living in a world designed for -- and increasingly controlled by -- algorithms.

In this thought-provoking talk from TEDGlobal, he shows how these complex computer programs determine: stock prices, espionage tactics, movie scripts, and architecture. And he warns that we are writing code we can't understand, with implications we can't control.

Here is a TedTalk by Kevin Slavin.

 

 

 

Risk-Off or Risk-On - What's a Trader To Do?

Fear is not logical.

Nonetheless, you can often use logic to predict human response to certain emotions and stimuli.

For example, let's look at the clear shift in investor sentiment over the last few weeks.

 

Click here for a live version of this chart.

In short, the money flows show a re-pricing of risk. Stocks and commodities, which are viewed as riskier assets, declined over the last two weeks. Bonds and gold, which are viewed as safe-havens, advanced as alternatives. The Dollar, which is somewhere in the middle is virtually unchanged.

There Are Other Ways to Measure Fear.

The sell-off of the past few weeks triggered a number of extreme measures. Whether you look at volatility, price action, breadth, or volume, recent readings were off-the-charts. The table below is from Quantifiable Edges. It highlights some of those extremes.

  

However, every action brings a reaction ... what can we expect next?

What Does the Volatility Bring?

We just saw four straight days with moves of 400 points or more in the Dow Jones Industrial Average ... a first in its history. Is that just a meaningless market statistic?

Perhaps, instead, it is another indicator that we're at a significant extreme?  If so, periods of great volatility are often followed by periods of relative calm.  The logic is that bulls and bears fight until one side gives up (for a while); and the market pushes forward in the direction of the winner.

Looking For a Positive Sign?  Here's a Promising Trading Signal.

Mark Hulbert says market indicator with perfect record just signaled 'buy'. 

Last week, we got to a point where less than ten percent of NYSE stocks traded above their 200-day average. When the number of stocks that manage to stay above this moving average -- a common measure of momentum -- make a nasty two standard deviation move to the downside from the norm, it usually means an oversold market and a good time to buy.

 

The last -- and most extreme -- oversold position was on March 2, 2009, about around the start of the bull market. Click here for more on this type of chart.

You don't have to like the economy or the markets to trade them.

 

Related Articles

• Trading Against Your Pain Level (community.tradeking.com)
• High-Frequency Firms Tripled Trades Amid Rout, Wedbush Says (businessweek.com)
• What Business is Wall Street in ? (blogmaverick.com)
• How to play an oversold relief rally (humblestudentofthemarkets.blogspot.com)

Using Mind-Maps in Business - Part 2

Mind mapping tools have been around for many years. However, I'm starting to see a much wider adoption of mind mapping throughout my company and with the wider business audience.

Part 1 of this series, Using Mind Maps, examined mind mapping and why you might want to use its "radiant thinking" process.  Here, in Part 2, we will look at some specific business uses for mind maps.

Below are four examples where mind mapping has proved useful to me recently.

Meeting Agendas: A mind map provides a great graphic overview of everything relating to the meeting, from attendee lists, meeting notes, web links, documents, to-do items, and parking lot issues.

 
Using the map during the meeting helps the team move above the details to keep the bigger picture in mind.

Employee Reviews: A mind map is helpful during the complete review life cycle.

• First, it's a great place to keep notes on how someone's doing and areas for improvement.
• Second, it's a great template to prompt the reviewer to look at the whole picture in a  fair and balanced way.
• Third, the map is easy to share and revise.

In addition, while you may take the notes based on business categories like performance, potential, flexibility, and attitude  -  you might deliver the review based on a "Green", "Yellow", and "Red" metaphor that makes it easy for the employee to understand and act upon.  Here is an example of that type of map.

Business Planning and Project Management:  This was one of the first areas where mind maps proved useful. It's a great tool to see the forest and the trees. 

Here is a simple decision-making template.

You will find that a mind map is a great tool to use interactively during meetings. It gives the team a common focus, yet allows the facilitator to adjust that focus efficiently and effectively.

In addition, Project View makes it easy to see the plan as a GANTT timeline or task table.  This is a terrific added capability.

Communication and Presentation Tool: Mind maps allow great flexibility an structure during presentations. This facilitates a logical and organized presentation, as well as ad hoc interactive discussions.

More experienced mind mappers tend to use fewer words, opting to use images and the heuristic structure itself as a catalyst and reminder for deeper meaning.

An added bonus of using mind mapping software to present your ideas is that the map can be updated and re-ordered while you are using it.  The map becomes the common-focus for an interactive discussion.

Cool special effects, like 3-D Views, turn your map into a 3 dimensional object, allowing you to glide around it from different angles, zoom in on different areas and transform presenting mind maps into a whole new experience.  Here is an example.

 

 

 

Obviously, there are many other things you can do with mind maps.

Here is a link to Buzan's Gallery of Mind Maps and here is a link to BiggerPlate's Mind Map Gallery.  In addition, here is a link to product tutorial videos.

The current generation of mind mapping tool is considerably more powerful, yet easier-to-use, than its predecessors. It's time to try it for yourself.

Related articles

• 7 mind map ideas to unlock creativity and innovation in your business - plus 14 free tools (krishnade.com)
• Mind-Map Your Way to Successful Projects (pcworld.com)
• Use Mind Maps for Better Notes and Ideas (ismckenzie.com)
• BiggerPlate.com mind map gallery adds support for iMindMap (mindmappingsoftwareblog.com)

Using Mind-Mapping Tools - Part 1

Mind maps are going mainstream. They're showing up throughout the office, with a wide variety of users and uses.

Initially, mind maps were simply a brainstorming, outlining, or note-taking tool. Now, they are showing up in thought processing, visual thinking, project management, process planning and presentations.

Tony Buzan is the father of modern mind mapping. Here is a video where he describes mind mapping and why you might want to use its "radiant thinking" process.

 

 

 

Tony Buzan's company recently released iMindMap 5. It is software that helps you create mind maps.  Here is a map made with iMindMap that explains the basic best practices of mind-mapping.

 

iMindMap 5 is a great tool that keeps getting better. You can certainly use it for a lot more than taking notes.

The product comes in various versions (starting with a no-cost basic version) and moving up to a full-featured Ultimate version, which includes rich project management and 3-D presentation tools.

Here is a video showing the software.

 

 
 
The current generation of mind mapping tool is considerably more powerful, yet easier-to-use, than its predecessors. You can download a copy of iMindMap to try for yourself.

 Next week, in part 2, I will show examples of maps made for specific business uses.

Related Articles

• iMindMap 5 launches with a goal of taking care of business (mindmappingsoftwareblog.com)
• Mind Mapping Software: More Powerful Than You May Realize (mindmappingsoftwareblog.com)
• BiggerPlate.com mind map gallery adds support for iMindMap (mindmappingsoftwareblog.com)

Snake-Oil? The Scientific Evidence for Various Health Supplements

Trying to lead a healthier lifestyle?  This data visualization can help you filter-out the marketing hype to help you find the vitamins, minerals and herbs that deliver tangible benefits ... versus those that serve only as a "Guaranteed Genuine Placebo".

This is an updated interactive model of the most current research data.

It is interesting because of the health research itself ... and also because models, like this, have far-reaching applications.  It comes from the site Information is Beautiful.

Click on the picture to play with the interactive version.

 

Kind of cool. 

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Hans Rosling - The Health and Wealth of Nations

The Joy of Stats is spreading.

You can watch a history of the modern world, in less than five minutes.

I'm surprised by how many people have sent links to this YouTube preview of The Joy of Stats. 

 

Somehow, with nothing more than animated bubble charts, Hans Rosling has become quite famous.

This four-minute clip shows Rosling presenting world development in the context of income versus lifespan. Rosling uses Gapminder, the software he and others had developed, to show multiply varying statistics as animations.

The material is more or less the same as his TedTalks; but this time around, the motion chart isn't projected on a screen. The data is CGI'd into the air where Rosling can pluck and grasp at points as he highlights the significance of specific points in history.

Until you’ve seen Hans Rosling in action you can have no idea just how moving a bunch of blue bubbles moving down a screen can be.

The BBC writes that:

Despite its light and witty touch, the film nonetheless has a serious message – without statistics we are cast adrift on an ocean of confusion, but armed with stats we can take control of our lives, hold our rulers to account and see the world as it really is. What’s more, Hans concludes, we can now collect and analyse such huge quantities of data and at such speeds that scientific method itself seems to be changing.

"I kid you not, statistics is now the sexiest subject on the planet" says Hans Rosling, presenter of The Joy of Stats.

 

Related articles

• Gapminder (r-bloggers.com)
• Hans Rosling animates 200 years of human development (rs.resalliance.org)

Capitalogix Commentary for the Week of 08/16/10

Tracking the Hindenburg Omen: How Much Danger Is There?

"Friday the 13th" got a little scarier than normal as warnings were heard from many corners of the financial blogosphere that the Hindenburg Omen triggered.

What is it?  It is a fairly obscure technical analysis pattern, which supposedly gives an early warning of unstable market conditions (and even potentially stock market crashes).

While the calculation is based on five factors, the primary conditions indicate that there is a big disagreement about market conditions.

For example, two of the conditions are that a substantial number of stocks have to be at yearly highs, while a substantial number of stocks have to be at new annual lows.  Ultimately, it is hard for those two conditions to be met in a short period of time, unless there's uncertainty in the market.  Moreover, after a rally, uncertainty is often a precursor to a decline.

In addition, technically (in order for the pattern to be complete), a second sighting of the five elements must occur within 36 days. Logically, lingering uncertainty is a momentum killer.

While this pattern has correctly predicted every big stock market swoon of the past two decades, including the October 2008 decline (that set the global economic recession into motion), not every Hindenburg Omen has been followed by a crash. Resorting to a geometry analogy: All rectangles are squares, but not all squares are rectangles.

Personally, I don't make trade decisions based solely on indicators like this. Nonetheless, it has a pretty good track record, seems to be based on reasonable theories, and might be useful as just another data point urging caution.

Tough Week for World Markets.

Taking a macro view, many markets around the world went down last week.  Notably, the NASDAQ was down 5%, the Nikkei was down 4%, and many other indices were down 3%.

Here in America, the Federal Reserve’s Open Market Committee startled financial markets by raising its terror alert level over the economy and declaring it would keep buying bonds to maintain its loose-money stance and fight deflation.  Despite the promise of help, the markets continued lower.

Let's Look at a Chart of the S&P.

What does a daily chart of the S&P 500 Index show?  Price has retreated from the resistance area (marked by the pink highlight).  In addition, price has gapped below the up-trend line (marked by the green line).  Combine that with a negative divergence in MACD momentum, and the picture is technically weaker than before.

Bulls are looking for an oversold rally.  Bears are looking at the unfilled gaps as breakaway gaps.

As always, it should be interesting.

Business Posts Moving the Markets that I Found Interesting This Week:

• Goldman Had 10 Days of Trading Losses in Q2. (WallSt&Tech)
• The Options Market's Take On H-P: Frenzied Buying in Put Options. (Barrons)
• Grand Tetons Possibly for Sale: Governor of Wyoming Says They Are Desperate. (Alternet)
• How Far Should Google Go to Profit From the Data It Has About People's Activities? (WSJ)
• Skype Files Plans for $100 Million IPO. (WSJ)

• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Hedge Fund Predicts "Apple Will Sell 50 Million iPads A Year". (BusinessInsider)
• Swarm Intelligence: Why Mimicking the Behaviour of Ants & Bees Is Smart. (Economist)
• What Your Appetite Reveals About How Your Brain Works? (PsychologyToday)
• BlackBerrys & Encryption - Spies, Secrets and Smart-Phones. (Economist)
• Google Goggles Lets You Search the Web With Your Mobile Phone Images. (Kurzweil)

• More Posts with Lighter Ideas and Fun Links.

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Finding Wisdom in Mountains of Data

In this video, Gary Flake demos Pivot, a new way to browse and arrange massive amounts of images and data online. Built on breakthrough Seadragon technology, it enables spectacular zooms in and out of web databases, and the discovery of patterns and links invisible in standard web browsing.

The big idea that this video demonstrates so well is that the whole of the data in which we consume is greater that the sum of the parts. And, instead of inducing information overload, new tools enable us to use information so that patterns pop and we can see trends that would otherwise be invisible.

If we can do that, then, instead of being trapped in data, we might actually extract information. And, instead of dealing just with information, we can tease out knowledge. And if we get the knowledge, then maybe even there's wisdom to be found.

Click here to view the transcript.

This tool, and others like it, will have massive impact on businesses and the scale of projects they undertake.

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