Category: Investing Insight

Investing insight to make you a better investor.

93 Technical Indicators that don’t Predict Market Returns

There’s a research paper out that looks at 93 common technical indicators and concludes that they have no predictive power whatsoever:

We review the predictability of a wide range of 93 technical market indicators in predicting the S&P 500 returns. This adds to the literature with evidence from widely used but less examined market indicators, to more conclusively answer the question of whether technical analysis is useful or not. Overall, we do not find the market indicators generate profits that beat the buy and hold strategy. This result does not change if we consider the possibility of regime-switching predictability on business cycles or sentiment cycles. Moreover, our results remain robust if we use a GARCH (1,1) or robust regression method.

Source: Technical Market Indicators: An Overview

Related: Technical Analysis

Categories , Tags

Refracting Fund Portfolios: PPFAS

  1. Where does alpha come from?
  2. How much should you pay for alpha?
  3. If a fund manager claims that his portfolio is a “long-term” bet, then does it make sense to just buy all the stocks in his portfolio rather than pay him an asset management fee for the privilege?
  4. How much do “other” investments add to returns?
  5. Will an equally weighted portfolio out-perform a hand-crafted weighting?

To answer these questions, we have started an experiment. We have created an equally weighted portfolio of NSE listed stocks in the PPFAS Long Term Value Fund (Factsheet.) The Theme will be re-balanced once a month, as soon as the PPFAS portfolio disclosure becomes public. As of the latest information available, 72% of the fund’s portfolio was invested in Indian equities & 21% is invested in foreign equities with the balance amount in Cash Equivalents.

Over a period of time, we hope to answer the questions we have raised above.

You can follow the Theme here: Refract: PPFAS Long Term Value Fund

Refract: (of water, air, or glass) make (a ray of light) change direction when it enters at an angle. From Latin refract- ‘broken up’, from the verb refringere, from re- ‘back’ + frangere ‘to break’.

Categories , Tags

You are always right in some universe

In recent years a number of investigators have developed the view that those supposedly irrational choices that people make merely reflect the fact that their brains are guided by the mathematical principles of quantum physics.
 
Quantum cognition has proved to be able to account for puzzling behavioral phenomena that are found in studies of a variety of human judgments and decisions.
 
Human judgments “are often not simply read out from memory, but rather, they are constructed from the cognitive state for the question at hand.” Consequently drawing a conclusion about one question alters the context, disturbing the cognitive system just as a quantum measurement disturbs an electron. Such disturbances will influence the answer to the next question, so that “human judgments do not always obey the commutative rule of Boolean logic.”

Source: Quantum math makes human irrationality more sensible

Categories , Tags

Doing Nothing: Bubble Edition

Aswath Damodaran, a Professor of Finance at the Stern School of Business at New York University, has an interesting post on market bubbles. Is it worth the time and effort to spot bubbles? What are you supposed to do if you have strong feelings about the existence of a bubble? I’ll just list his key takeaways here, you should read the whole thing at your leisure.

  1. There will always be bubbles. Bubbles are part and parcel of financial markets, because investors are human.
  2. But bubbles are not as common as we think they are. And they are not always irrational.
  3. Bubbles always look obvious in hindsight.
  4. Bubbles are not all bad.
  5. Doing nothing is often the best response to a bubble.

Source: Bubble, Bubble, Toil and Trouble: The Costs and Benefits of Market Timing

Categories ,

Market Cap Deciles

Introduction

Segmenting the market to track performance, risk etc. has been around for a long time. The Dow Jones Industrial Average was launched in 1896, the Sensex since 1986 and the Nifty since 1995. They provide a short-hand to gauge market performance and track returns over a period of time.

Index construction

An index can be constructed based on any combination of factors that are common to its constituents. They can be sectoral like FMCG, IT, etc. or they can be based on fundamental factors like book value, sales, etc. However, the most common way to construct an index remains free float market capitalization. This is the approach that most indices, like the Nifty, take.

The Nifty lists the following criteria for its constituents (NSE):

  1. Liquidity (Impact Cost)
  2. Float-Adjusted Market Capitalization
  3. Float
  4. Domicile
  5. Eligible Securities
  6. Other Variables

Deciles vs. Indices

Using existing indices come with some disadvantages:

  1. Rebalancing usually occurs once every 6 months – a lot can happen in that time.
  2. They usually have “other” considerations – not entirely quantitative.
  3. Do not cover the entire market – the biggest index in the NSE is CNX 500 that track 500 stocks.

An alternative is to build your own set of indices based on purely quantitative considerations. For example, you could divide the market into deciles based on their free float market cap and set a minimum daily turnover. This will then allow you to track micro-cap through mega-cap performance over arbitrary time frames, track how different stocks transition through deciles, set up “early warning” signals, etc.

Example

If you divide the market into deciles and set the minimum daily turnover to be 0.01% of float, then you end up with about 140 stocks in each. The 1st decile would be the micro-caps while the 10th would be the mega-caps. Here’s how the different deciles performed this week:

decile

Watch out for decile performance charts in our weekly and monthly performance roundups!

Categories , Tags ,