ANTS

Analyzing the Nasdaq Streak

I think Greensleeves shows that working on "streak analysis" is hard work.

I have found that a dynamic valuation model is a better way to go. You can use any formula that appears appropriate but it must contain an earnings revision and market premium component. As a stock (or index) is going up,it is a combined reaction to earnings revisions (either disclosed or about to be disclosed) and changes in premium (or market sentiment).

For example analysts may be upgrading earnings, but the market is not reacting, and therefore the premium is high. At some point, the market accepts these revisions and the premium shrinks. The stock then goes for a run because the new valuation will have both higher earnings and lower premium. There are many market dynamics of this nature which are worth following.

It is the dynamic interaction between these two components, once identified and quantified, that leads to superior forecasting.

How Stock Market Indices Underperform

So, why is it that active management cant outperform the "underperforming" index. More to think about.

How Low Can They Go?

Im with Chubb in that sometimes Bespoke does print interesting things that otherwise miss my attention. The problem for me is that its scatter gun. Even if there is an aspect of the market that appears interesting, it could well be the last time it gets a mention. Without follow through, it becomes entertainment rather than a base for analysis.

Finding Meaning in Volatility

Tao Man would have to agree that volatility is high at the moment, but we don't see too many people doing what he suggests. The fact is buying into this market exposes the investor to a wild ride at best. If we take BHP the current price is around $40, near term low $33 and near term high $49. So do you buy and watch the stock perform a round robin up and down, or do you conclude that the future is uncertain and very risky, and therefore why bother. Better to have invested 5 years ago when it was $15, low volatility and gradual but consistent upside returns.

Finding Meaning in Volatility

I don't see that that "volatility and correlation...are amenable to analytical prediction". Volatility is derived from prices. If you can't predict price, then you can't predict volatility. What you may be able to do is to say that volatility reaches upper or lower bounds, and in the world of options trading there is possibility of making money from that.

What it says to me is that the lower the volatility, then the more one can invest in the asset class. When vol was low in the stock market, then it was safer to have an overallocation to stocks. Now that vol has increased, then stock allocation should be reduced.