Category: Investing Insight

Investing insight to make you a better investor.

Market-Cap Deciles, Part III

shyam April 24, 2016July 16, 2016 0

Part I, Part II of the series.

111% vs. 11%

A portfolio of ~150, equal-weight, small-cap stocks, rebalanced monthly, gave a return of 111% from 2015 through now.

While a similar portfolio of mega-cap stocks gave a return of 11% during the same time frame.

Variance

Returns from the small-cap portfolio are accompanied by larger volatility.

Accessibility

Is the alpha accessible? Given the meager volumes in the small-cap space, narrow circuit breakers and intra-day volatility of prices, small-cap alpha is hard to access. The impact cost of trading 150 small-cap stocks every month would be pretty high for large positions.

However, a portfolio with an exposure of Rs. 10,000 – Rs. 50,000 per stock is doable. So, theoretically, you can size the portfolio between Rs. 15,00,000 – Rs. 75,00,000 to access this alpha.

Appendix

Cumulative wealth charts for each decile (both cap- and equal-weighted): (a)

Box plots of cumulative returns of stocks in each decile: (b)

Categories Investing Insight, Your Money Tags decile, quant

Introducing the Global Macro Dashboard

shyam February 16, 2016 0

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.

Categories Investing Insight, Your Money Tags macro

Macro Volatility and the NIFTY 50

shyam February 10, 2016 0

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:

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

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.

Categories Investing Insight, Your Money Tags quant, volatility

World Markets and the NIFTY 50

shyam February 9, 2016 0

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:

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.

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:

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

Categories Investing Insight, Your Money Tags quant

India VIX vs. SPX VIX

shyam February 7, 2016 0

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.

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 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 by year.

Conclusion

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

Categories Investing Insight, Your Money Tags quant, VIX