Monthly Archives: May 2007

Black Swan Positive

I stumbled across a +45 minute podcast from the Royal Society of Arts yesterday which is highly entertaining, in a quantitative sort of way. The speaker that night was none other than Nassim Taleb, author of Fooled by Randomness and The Black Swan. It’s a fantastic listen to, especially when he talks about something called “Black Swan positive.”

Black Swan Events (BSE) are outlier events, events that you never dreamed of occurring but they do. Sometimes these are negative events where the outcome is very bad for you. An example that comes to mind was Enron, no one saw it coming and neither did Arthur Anderson. I bet the Anderson people never dreamed that this single event, from a single client, could cause them to go out of business.

The more interesting BSE’s are the positive ones, these are the eureka type events which transform our daily lives into something better. An example that comes to mind is the discovery of penicillin, which was completely by accident!

According to Nassim, you should invest in companies that are BS positive because it limits your downside risk and leverages your upside. That’s great advice but the trick is finding these companies and then paying a cheap price for them! :)

[tags]Risk, BlackSwan, Randomness, Podcast, Enron[/tags]

Health Care SPDR – (XLV)

I went long XLV in mid January 2007 for one of my personal IRA accounts. Its had its share of ups and downs but it doesn’t take a rocket scientist, or a fancy neural net, to figure out that health care is a long term bet. If you don’t believe me, look around for all the graying baby-boomers who want to desperately hold onto their youth.

This time I’m holding XLV for a very long time and won’t be shaken out of it.

XLV-052907

Disclosure: Long XLV

[tags]XLV, Healthcare, Investing, ETF, Boomers, Baby, Gray[/tags]

Currency Trends

There was a roller coaster of action in currency markets last week and all my intra week signals flipped once again. In some cases, long term trends reestablished themselves, and in other, new trends seem to be emerging. Here are the trend signals for the close of last week:

  • AUD – STRONG UP
  • GBP – RANGE
  • USD – STRONG DOWN
  • EUR – STRONG UP
  • JPY – DOWN
  • CHF – RANGE

I feel a lot better about my long EURUSD position now. :) Along with common sense, my models still forecast a DOWN trend for the dollar but we must remain vigilant. Intra week flips could mean two things: it’s just noise or some significant levels were reached and reversals are possible.

Check out Howard’s take on the woes of the USD.  He usually has good insight. :)

[tags]AI, Neuralnets, Forex, Currency, Euro, Dollar, Pound, Yen, Swiss[/tags]

Chipotle Mexican Grill, Inc. – (CMG)

CMG is hitting an all-time high these days and after eating their tasty food, I can understand why. Good food at high prices is always a surefire way to make your stock a winner, until your fickle customers become cost conscience.

CMG-052907

My favorite dish is the chicken burritobol w/ sour cream and the red hot sauce. :)

[tags]CMG, Chipotle, Mexican, Food, Stocks, Trends, Trading[/tags]

Calculating Historical Volatility

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The inspiration for my S&P500 Volatility Timing model came from rereading portions of Mandelbrot’s book, The (Mis)Behavior of Markets, and trolling around the Internet for Nassim Taleb’s research work on risk. I think both guys push the envelope on truly understanding unseen risk and those pesky financial asteroids. Since my model is currently being developed, I thought it would be worth my while to truly learn and understand how historical volatility (HV) is calculated. I first searched the Internet for any free data downloads of HV but came across several pay for data download sites.

One of them, iVolatility.com, seemed to have comprehensive data but it was expensive. One year’s worth of HV for one asset price would’ve cost me $5! So what does any engineering type person do in the face of expensive solutions? He (or she) build’s their own cheaper solution. I decided to calculate HV on my own after reading about it on wikipedia. Now, I’m submitting this analysis for peer review as I’m treading in unfamiliar waters. Please feel free to correct me if my computations or understanding of the material is wrong.

Wikipedia defines HV as:

The annualized volatility σ is the standard deviation σ of the instrument’s logarithmic returns in a year.

Furthermore,

The generalized volatility σT for time horizon T in years is expressed as:

sigma_T = sigma sqrt{T}.

Note: There’s a flaw in the Wikipedia’s formula logic after the generalized volatility formula above as pointed out by C++ Trader (thanks for the catch). Please see the related links below for more information on the correct calculation of HV.

Note that the formula used to annualize returns is not deterministic, but is an extrapolation valid for a random walk process whose steps have finite variance.

So the first step is to calculate the S&P500’s logarithmic returns for a year. I’ll be using the weekly time series and I’ll analyze it in a handy Excel spreadsheet here: HV Example.xls

Once again I’ll turn to wikipedia for an explanation of logarithmic returns:

Academics use in their research natural log return called logarithmic return or continuously compounded return. The continuously compounded return is asymmetric thus clearly indicating that positive and negative percent returns are not equal. A 10% return results in 9.53% continuously compounded return while a -10% results in -10.53%. This clearly indicates that the investment will result in a dollar amount loss corresponding to the difference between the absolute values of the two numbers: 1% (this is an approximate equality).

  • Vi is the initial investment value
  • Vf is the final investment value

ROI_{Log} = lnleft(frac{V_f}{V_i}right).

  • ROILog > 0 is profit
  • ROILog < 0 is a loss
  • Doubling occurs when ROI_{Log}=ln(2)=69.3%
  • Total loss occurs when ROI_{Log}to-infty.

This should be straightforward and I will calculate the weekly ROI for the S&P500. Why? Well I’m interested in calculating weekly HV so my Vi will be the week(1)’s closing price and Vf will be week(2)’s closing price. For the next iteration Vi will be the week(2)’s closing price and Vf will be week(3)’s closing price and so forth.

Next I created an Excel Macro that would calculate the natural log and simultaneously calculate the HV for 10, 20, and 30 days using the standard deviation of the daily logarithmic returns multiplied by 252 (see related links below).

There you have it, your very own weekly HV! Feel free to download the Excel macro and play with it. By all means, please critique my analysis and let me know if my logic is flawed! The more I learn about this, the more my ATS takes shape!

Update: The Excel Macro matches the output from iVolatility.com for the 10, 20, and 30 day HV’s. Check!

Related:

Forex Thoughts

The month of May has turned out to be a painful one for me and my Forex trading account. I didn’t trade as much as I did in previous months, instead I opted for more of a “swing” trading strategy by buying on dips. That strategy proved to be a bit hazardous to my profits. The EURUSD sold off from its second test of its all time high and then dropped down to the $1.34 level. I began to average down and prune some over-leveraged losers in the process.

I continued with this crazy strategy because my neural nets continued to flash “BUY” signals. I didn’t become concerned until last week when the model started flashing “RANGE.” This signal indicates a possible price holding pattern in the currency pairs OR a possible trend change.

Right now I’m still long 603 units of EURUSD at an average price of $1.35377; the currency pair is trading at $1.34885. :)

[tags]Forex, AI, NeuralNets, Currencies, Trading, Euro, Dollar[/tags]

FXI & Gold Trends

I’m sneaking in a quick post on this cloudy Memorial Day because my kids and guests are all sleeping. I’ve downloaded and updated the prediction data sets for my FXI and Gold models, both trends remain UP.

[tags]FXI, Gold, Trends, AI, NeuralNets, Models, Analysis, ETF[/tags]

Need Your Help To Build A New Neural Net Trend Model!

As a way to continue to make Neural Market Trends a great place to visit on the web, I’m going to post development details and notes of a new trend model that we will create. I want to, over the course of a few weeks, engage my readers and myself into building a new trend neural net model of our collective choosing. We will use the 9 steps to success in neural net model development as our outline and we’ll detail the progress and thought process of building this model on this blog.

We will use the open source YALE data modeler and free data sources to build this model. This is a great way, in addition to my “Build A Model” lessons, to build something totally from scratch and truly learn how take your investing to a new level.

Does this sound like a good idea? If you’re interested, drop me a comment!

PS: I’ll resume posting next Tuesday as I’m taking a few days off to celebrate Memorial Day! Have a good one!

Currency Trends Revised

This just in!  There have been some flips in the Currency Trend neural net models:

  • AUD – RANGE
  • GBP – DOWN
  • USD – RANGE
  • EUR – RANGE
  • JPY – DOWN
  • CHF – DOWN

[tags]Neuralnets, AI, Currency, FOREX, Trading, Timing[/tags]

Chinese Inspired Global Investment Rally

If the world follows the typical supply and demand economic theory, we are about to witness the beginning of a major global rally. The Chinese government recently loosened laws allowing its banks to invest indirectly in foreign equities and derivative products. China currently sits on $4.8 trillion dollars worth of reserve assets, of which it wants to slowly inject a percentage into the global markets over the next several years.

The end result will be more money chasing fewer assets and prices going through the roof! I’m glad I’m long all the way in our 401K’s. The trick will be to get out right before the party ends.

Related: China grants Blackstone $3B to invest abroad (via CNN)

[tags]China, Global, Markets, Yuan, Dollar, Investing, Trading, 401K[/tags]

Currency Trends

XSF-052107Good Morning! This week’s currency neural net models have been updated and all the signals remain the same except for the Swiss Franc. Swissy is now giving a DOWN signal. What’s surprising to me is that my Euro model keeps flashing a STRONG UP signal throughout the recent sell-off. My personal opinion is that this is small correction and the overall trend remains in favor of the Euro. Only time will tell.

  • SF – DOWN
  • JY – DOWN
  • EU – STRONG UP
  • DX – STRONG DOWN
  • BP – STRONG UP
  • AD – UP

Disclosure: Long EURUSD

[tags]Euro, Dollar, Currency, Forex, Trading, Investing[/tags]