On Short Term Price Trends in Russia's Stock Market- Part II

by: Michael Stokes

In my previous post I looked at the Russian stock market and showed that like India, but unlike the US, short-term price changes in Russia are momentum, not mean-reversion driven. That’s important for at least two reasons: (a) short-term indicators like RSI(2) will work opposite the way they do in the U.S., and (b) it completely changes the dynamic of whether we should let winners run or take profits quickly, and cut losses early or wait for trades to develop.

This post will be about two oddities in the Russian data that I know are important to the U.S. market, but I’m still wrapping my head around why.

20090707.01
[logarithmically-scaled]

In my previous post, I showed a graph like the one above that assumed a trader went long (at the close) following a close up, and short following a close down, Russia’s RTS Index (denominated in USD), from 1996 frictionless (these results wouldn’t actually be achievable, but just for giggles, that’s a 132% annualized return). Note that based on these results, the Russian market is momentum-driven: up days tend to follow up days, and vice-versa.

ODDITY #1: BEND IN THE EQUITY CURVE

Note the bend in the equity curve in the graph above (denoted by red arrow). Right about that time, follow-through in Russia lost a good deal of its steam. It still existed, but was far less potent than the years prior.

That change occurred right around the turn of the millennium, which is of course interesting, because it’s right about the same time that follow-through in the U.S. flipped from being momentum to mean-reversion driven (read more here and here).

So the question is: (a) was this roughly simultaneous change in Russia because of the influence of the U.S. market? Or (b) did both change because of some third outside influence (more on this below)? Or (c) is this purely coincidence?

It would be interesting to do a study of how each market directly influences the other like I did with East Asia (read more). If there is a strong connection with the U.S. (like Hong Kong), then a, b, or c above might be true. If there isn’t a strong connection (like in Shanghai), then only b or c might be true. More to follow on this.

ODDITY #2: INDEX DENOMINATED IN RUBLES

This is the one that really has my goat.

Compare the graph above of follow-through in the Russian index denominated in USD, to the one below of the same strategy applied to the index denominated in Russian rubles…

20090707.02
[logarithmically-scaled]

Note the breakdown in follow-through over the last year or so (red arrow). It’s a little hard to put in perspective because this is a logarithmic-chart, so below I’ve included a graph of the drawdown of this same strategy (i.e. how far the strategy is from its highs at any given moment).

20090707.03

Now the breakdown is a bit easier to see. Since about October of last year, follow-through in Russia has flipped contrarian (and is now like the U.S.).

Is this change permanent? I don’t know, but if it is, it raises a very interesting question:

Do fluctuations in the strength/weakness of a nation’s currency have an impact on short-term momentum vs mean-reversion in the country’s stock market? Remember that the only difference between the first and second Russian tests were that the first was denominated in USD, and the second in Rubles.

We’ve seen the Ruble growing stronger over the last 6 months and a breakdown in short-term momentum in the last 9 – are these connected? We saw stabilization and even appreciation in the Ruble between 2000 and mid-2008, and over the same period, a tempering of short-term momentum – are these connected? Or are these both being driven by some third outside influence?

I don’t know the answer to any of these questions, but it’s uncanny how well the events line up.

I’m going to keep plugging away at this concept. Short-term U.S. price movement is so important to what we do in our own proprietary strategies that anything we can do to model and better understand its ebb and flow (and when it will make its next evolution) is incredibly important.

Happy Trading.

On Short Term Price Trends in Russia's Stock Market - Part I