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« Bears Prepare for Fox Business News | Main | Results Matter: Conducting Objective Reviews »

October 04, 2007


Jason Ruspini

I'm not sure those papers are much of a challenge to what I think your style of trading is, Jeff. The Stangl/Jacobsen/Visaltanachoti paper examines rotating pre-set groups of industries by business cycle, and it actually finds that such a strategy does improve returns - before transaction fees and it is not possible to execute without the benefit of hindsight. Either way it is pretty moot with respect to your strategy.

The Cremers/Petajisto paper is more complicated, but using it as an argument against sector trading might be misleading. First, high tracking error + "low active share" is a blunt way to describe funds that rotate sectors. For one thing it's possible that some managers ran non-rotating "closet sector funds", especially during the late 90s in technology, and the study ended in 2003 which would penalize such managers. Second, the gross return statistics (8A) for high tracking error + low active share funds in the paper are not significant. Third, the "4-factor alpha" gross and net statistics for those funds are significant, but the 4th factor (in addition to the usual three) is momentum. If you are running your own ETF momentum strategy, aside from evaluating the quality of your momentum logic, you are probably most interested in comparing its performance to gross returns without a momentum component.

Most importantly, the study covers mutual funds that are not allowed to sell short. Maybe my reading of the paper is colored by the recent past and the ease - even without hindsight - of running a 130/30 portfolio with a mix of housing, consumer disc. and finance on the short side. To me that is more of a modern sector rotation portfolio.

Bill aka NO DooDahs!

I'm actually long several of those you mentioned, based on *trend-following asset allocation models.* I don't personally play the macro "what if" game; my statement is aimed at those who do, and do so incorrectly.

Here's the consensus, bearish, and incorrect view, based on the dollar hitting "all time lows" - imminent "recession" in the U.S. and a "slowdown in world economic growth," as incorrectly measured by economists. The contrary macro-based play is "soft landing." What does well in each scenario? You do the math.

Me, I'll stick with more mechanical methods. On top of being fools for macro modeling on the wrong data series, I think it's foolish to try and build a trading model based on another model of macroeconomics. 2 models to get to 1 result means twice as many chances for error.

Mike C

"Macro models based on the trading index are flawed. To the extent that less thoughtful or less knowledgeable market participants make decisions based on such models, it give the smarter participants a contrary opportunity."

Just curious, how would one implement this knowledge in terms of actual investing/trading decisions.

It seems the less knowledgeable market participants are piling into anti-dollar trades like long gold, commodities, international stocks, emerging stocks, etc.

Would your position be to short these areas against being long U.S. stocks and U.S. bonds since the U.S. dollar is actually much stronger on the alternative measure?

What exactly is the contrary opportunity here based on ignoring the conventional measure?

Bill aka NO DooDahs!

Thnx for the link love.

In recent years, both the trading and the macro dollar indices have been down. As traders, this needs to be accounted for.

My contention is that those who use the trading index to infer macroeconomic conclusions are ignorant, because the trading index is not representative of economic reality. Vis a vis U.S. trading partners, the dollar is nowhere near its all time lows.

Macro models based on the trading index are flawed. To the extent that less thoughtful or less knowledgeable market participants make decisions based on such models, it give the smarter participants a contrary opportunity.

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