Author: shyam

Introducing the Global Macro Dashboard

It is all local until it is not

World markets just witnessed a spiraling sell-off that caught most investors off-guard. The problem is that for most of the time, markets are local. Except for those times when they aren’t and correlations go to 1.

We tried singling out different factors to check if they could act as leading indicators of market sell-offs:

It is not one thing and it is never the same thing

The problem is that, statistically, no one global indicator is going to be a perfect canary in the coal mine. However, once the number of “meaningful” events crosses a threshold, correlations tend to 1.

But what exactly defines “meaningful?” Is it 1-sigma or 2-sigma? Should it be change in price or price itself? What should be the number of periods over which these statistics are calculated? The answers to these questions are going to take a while to figure out. In the meantime, we decided to create a dashboard that lets investors choose some of these filters.

You can play with our Global Macro Dashboard here: StockViz/GlobalDashboard

Welcome to glocal markets.

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Macro Volatility and the NIFTY 50

This post is a continuation of our exploration of trying to use macro market indicators to time the NIFTY 50. See World Markets and the NIFTY 50 and India VIX vs. SPX VIX.

Perhaps the problem with using price moving averages was that the major moves were already done before we could short the NIFTY. What if we used volatility instead? Here is how the median of 10-day volatility of major world indices looks like:

macro.volatility

What if we went long only when volatility was below the median and went short otherwise?

macro.trade.a

Looks like the strategy works only in avoiding the 2008 crash. Using observed volatility to time trades doesn’t work. One more to the reject pile.

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World Markets and the NIFTY 50

global.etf.performance.2015-12-30.2016-02-08

Global markets have sold off in tandem so far this year. The question on everyone’s mind is if markets are correlated during sell-offs, then is it possible to construct a “world markets indicator” that will allow traders to short the NIFTY?

Constructing an SMA index

There are about 40 world index ETFs listed in the NYSE that provide a dollar based proxy to world equity markets. Using historical data, one can construct an index that tracks the fraction of these markets that are trading above their simple moving averages (SMAs.) If the index dips below a certain level, it could mean that a macro sell-off is in progress and one could proceed to short the Nifty. We constructed a 5- 10- and 50-day index of global market ETFs:

macro.sma

Using the SMA index to trade

So what if we used the SMA indices to go long and short the NIFTY? What we did below was to go short the NIFTY if the fraction of world markets trading below their SMAs were below their historical medians and long otherwise.

macro.trade

Between 2007 and now, the 5- and 10-day SMAs (black, red) under-perform a buy-and-hold (blue) strategy. However, the 50-day strategy (green) helped short the 2008 crisis and the current sell-off.

But let us zoom into the period between 2011 and 2014:

macro.trade2

This is where macro under-performs buy & hold (negative returns vs. positive.)

Year-wise returns of the different strategies:

Year 5-day SMA 10-day SMA 50-day SMA Buy and Hold
2007
50.58%
7.01%
12.03%
54.77%
2008
-2.51%
65.04%
69.88%
-51.79%
2009
-20.12%
-37.06%
18.47%
75.76%
2010
-4.11%
-23.86%
-19.11%
17.95%
2011
-24.00%
-16.30%
7.68%
-24.62%
2012
14.09%
16.66%
1.22%
27.70%
2013
-19.15%
6.02%
-8.94%
6.76%
2014
1.07%
-1.97%
-1.17%
31.39%
2015
13.56%
-4.39%
25.32%
-4.06%
2016
-4.77%
-4.60%
-6.13%
-7.04%

Conclusion

  • Given the volatile nature of the SMA World Indices, expect to take a fairly large hit on trading costs.
  • The 50-SMA based strategy under-performed buy and hold in 6 out of 9 years.
  • The 50-SMA based strategy under-performed buy and hold in 3 consecutive years – 2012, 2013 and 2014 – making it a hard strategy to be faithful to.

Related: India VIX vs. SPX VIX

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India VIX vs. SPX VIX

The VIX index is considered a gauge of fear in the markets. A high VIX entails high option implied volatility and occurs when traders bid up options. Given the recent market turbulence where pretty much all asset classes and equity markets across the board tanked, we wanted to check if VIX indices across markets had any relationship with each other.

VIX since 2009

The India VIX index was introduced only in 2009. Let’s start by plotting it vs. the S&P 500 (SPX) Vix to see if it passes a visual sniff test.

vix.historical

We can see at least five instances where India Vix popped without a corresponding move by SPX VIX.

Distribution

The problem with trying to nail down a relationship between the two indices is that, as one would expect, India VIX is way more dispersed than its SPX counterpart. Here’s the density plot.

india vix - spx vix density plot

India vs. spx vix density plot by year.

They might share the same suffix, but they are two completely different beasts.

Cross-correlation

The plots above look at VIX levels. Maybe we should check if the changes in VIX are related. Here’s the cross-correlation plot.

india vix and spx vix cross-correlation plot

India vix and spx vix cross correlation by year.

Conclusion

We cannot really use the two Vix indices to predict each other’s moves.

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Monthly Recap: Carnage

world.2015-12-31.2016-01-29

Equities

Major
DAX(DEU) -8.80%
CAC(FRA) -4.75%
UKX(GBR) -2.54%
NKY(JPN) -7.96%
SPX(USA) -5.60%
MINTs
JCI(IDN) +0.48%
INMEX(MEX) +0.57%
NGSEINDX(NGA) -16.50%
XU030(TUR) +2.99%
BRICS
IBOV(BRA) -6.79%
SHCOMP(CHN) -22.65%
NIFTY(IND) -4.82%
INDEXCF(RUS) +1.34%
TOP40(ZAF) -3.78%

Commodities

Energy
Heating Oil -3.91%
Natural Gas -1.66%
RBOB Gasoline -11.16%
WTI Crude Oil -10.10%
Brent Crude Oil -4.76%
Ethanol +1.79%
Metals
Palladium -11.05%
Silver 5000oz +3.62%
Copper -3.29%
Gold 100oz +5.37%
Platinum +0.33%

Currencies

USDEUR:+0.42% USDJPY:+0.79%

MINTs
USDIDR(IDN) -0.07%
USDMXN(MEX) +5.13%
USDNGN(NGA) -0.17%
USDTRY(TUR) +1.33%
BRICS
USDBRL(BRA) +0.98%
USDCNY(CHN) +1.27%
USDINR(IND) +2.48%
USDRUB(RUS) +3.59%
USDZAR(ZAF) +2.66%
Agricultural
Cotton -3.97%
Soybeans +1.23%
Wheat +1.75%
Coffee (Arabica) -7.87%
Lean Hogs +10.06%
Cocoa -11.17%
Coffee (Robusta) -6.98%
Corn +3.70%
Soybean Meal +2.84%
White Sugar -3.72%
Cattle -0.74%
Feeder Cattle -6.28%
Lumber -6.05%
Orange Juice -5.13%
Sugar #11 -13.48%

Credit Indices

Index Change
Markit CDX EM -0.81%
Markit CDX NA HY -2.26%
Markit CDX NA IG +16.56%
Markit iTraxx Asia ex-Japan IG +19.42%
Markit iTraxx Australia +17.89%
Markit iTraxx Europe +14.77%
Markit iTraxx Europe Crossover +51.56%
Markit iTraxx Japan +15.56%
Markit MCDX (Municipal CDS) +6.25%
A fresh bout of volatility hit the markets in January. EM currencies crashed, China capital outflows accelerated and Japan announced negative interest rates. The first half of February will see companies announce their quarterly results, adding a fresh dose of fuel to the volatility fire…

International ETFs (USD)

global.etf.performance.2015-12-31.2016-01-29

Nifty Heatmap

NIFTY 50.2015-12-31.2016-01-29

Index Returns

For a deeper dive into indices, check out our weekly Index Update.
index.performance.2015-12-31.2016-01-29

Market Cap Decile Performance

Decile Mkt. Cap. Adv/Decl
1 (micro) -17.03% 69/71
2 -9.17% 65/74
3 -15.39% 52/87
4 -16.38% 45/95
5 -18.88% 41/98
6 -14.42% 45/94
7 -15.34% 51/89
8 -15.24% 56/83
9 -16.29% 55/84
10 (mega) -7.84% 67/73
Mid- and small-caps bore the brunt of the selloff…

Top Winners and Losers

TITAN +4.77%
INFY +5.38%
SUNPHARMA +6.44%
RCOM -29.58%
IDEA -28.19%
PNB -21.09%
Whats the difference between a Brutality and Fatality?

ETF Performance

GOLDBEES +6.32%
NIFTYBEES -5.07%
CPSEETF -6.19%
JUNIORBEES -8.02%
BANKBEES -8.28%
INFRABEES -12.00%
PSUBNKBEES -20.00%
Gold saw a bid on the back of Rupee collapse…

Yield Curve

yieldCurve.2015-12-31.2016-01-29

Bond Indices

Sub Index Change in YTM Total Return(%)
0 5 -0.13 +0.99%
5 10 -0.06 +0.96%
10 15 -0.02 +0.86%
15 20 +0.06 -0.04%
20 30 +0.11 -0.48%
Bonds proved their worth during the turmoil – diversification FTW!

Investment Theme Performance

Tactical CNX 100 -3.66%
Enterprise Yield -4.30%
HighIR Momentum -4.77%
Low Volatility -5.31%
Low Beta -5.75%
High Sharpe -6.27%
High Alpha -6.42%
Balance Sheet Strength -8.44%
Magic Formula -10.25%
Financial Strength Value -10.76%
Velocity -11.18%
Acceleration -11.41%
High Beta -12.19%
Quality to Price -14.25%
Momentum -16.59%
Momentum saw the worst drawdown among all strategies. But the last few days have seen a dramatic recovery…

Equity Mutual Funds

Best
Canara Robeco InDiGo Fund – Regular Plan – Growth +1.49%
SBI REGULAR SAVINGS FUNDS – REGULAR PLAN – GROWTH +0.92%
Axis Triple Advantage Fund – Growth Option +0.80%
JM MIP FUND-Growth +0.64%
LIC NOMURA MF Liquid Fund-Growth +0.59%
L&T Short Term Income Fund-Growth Option +0.52%
L&T Ultra Short Term Fund – Growth Plan +0.51%
Worst
ICICI Prudential MidCap Fund – Regular Plan – Growth -9.81%
Sahara Star Value Fund-Growth Option -9.83%
HDFC Core and Satellite Fund – GROWTH -9.90%
UTI Infrastructure Fund-Growth Option -10.14%
HDFC INFRASTRUCTURE FUND-GROWTH OPTION -11.16%
HDFC Premier Multi-Cap Fund-Growth -11.95%
Mirae Asset China Advantage Fund – Regular Plan Growth Option -14.15%

Bond Mutual Funds

Best
DWS Inflation Indexed Bond Fund – Regular Plan – Growth +1.55%
ICICI Prudential Constant Maturity Gilt Fund – Regular Plan – Growth +1.35%
DSP BlackRock Constant Maturity 10Y G-Sec Fund – Regular Plan – Growth +0.99%
HDFC Gilt Fund-Short Term-Growth +0.95%
Franklin India Banking & PSU Debt Fund – Growth +0.84%
Tata Gilt Mid Term Fund -Regular Plan- Growth +0.74%
IDFC GSF-Provident Fund-Regular Plan-Growth +0.73%
Worst
Birla Sun Life Income Plus – Growth – Regular Plan -0.56%
JM G-Sec Fund – Growth Option -0.59%
ICICI Prudential Long Term Gilt Fund – Regular Plan – Growth -0.73%
Canara Robeco Dynamic Bond Fund – Regular Plan – Growth -0.76%
Birla Sun Life Government Securities Fund – Long Term Plan – Growth – Regular Plan -0.84%
Canara Robeco Gilt PGS – Regular Plan – Growth -0.94%
IDBI Gilt Fund Growth -1.07%

Thought to sum up the month

Here’s what happens when you make short-term decisions with long-term capital:

  • You constantly change your strategy and chase past performance.
  • You ignore any semblance of a long-term plan.
  • You end up being reactive instead of pro-active with your decisions.
  • You incur higher fees from increased trading, due diligence and switching costs.
  • You lose sight of your actual goals and time horizon.
  • You end up with a portfolio that’s built to withstand the last war, not the next one.
  • You lose out on much of the long-term benefits that come from diversification, rebalancing and mean reversion.

Source: Short-Term Thinking With Long-Term Capital

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