Tag Archives: seeking

Getting Out In Front Of The Next Bear Market

Summary Anyone that has been investing for any reasonable length of time knows that bear markets are inevitable. Most of the financial media and experts agree that the definition of a bear market is a drop of 20% or more from the high water mark. Keep an open mind to multiple scenarios and avoid becoming overly confident in a specific outcome. Anyone that has been investing for any reasonable length of time knows that bear markets are inevitable. It’s just part of the normal cycle of capital flows that swing from risk to safety with little dependable timing or logic. Most of the financial media and experts agree that the definition of a bear market is a drop of 20% or more from the high water mark. Of course, there is no way to accurately forecast when or where the next bear market will appear. They simply come and go with only hindsight as our guide as to what perceived causes led to the pernicious drop in your portfolio. Right now the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) is approximately 11% off its all-time high. I think that most people would probably put that number next to “correction” in the dictionary rather than bear market. Nevertheless, many experts are already saying this is the big one. The first bear market since the 2008-2009 financial crisis. It’s already here and you better prepare yourself for Armageddon. If you bear with me for a moment (no pun intended), I want to lay down some thoughts as to the motivations for this sentiment. This may very well be the start of the next bear market, but no one knows with absolute certainty where the bottom might be or how the pattern will play out. My advice is to keep an open mind to multiple scenarios and avoid becoming overly confident in a specific outcome . Everyone wants to be the guy or gal who “called it”. They knew from the beginning that this time was different, and after a half-decade run, that the probabilities are favoring a down cycle. This is probably more driven by ego and self-satisfaction than trying to guide your hard earned nest egg or protect capital. Be wary of those who scream the loudest on the way down, for they are likely the ones who will be left on the sidelines as the market heads higher. Changes to your portfolio during a correction or bear market should be made with calculated steps. This may include selling into rallies or making subtle changes to your asset allocation in order to reduce your overall risk profile. That also means fighting the urge to capitulate on big down days or making drastic changes at inopportune times. Nothing goes straight up or straight down in a perfect sequence. The market does move fast, but you have to pick your spots in order to avoid making a big mistake born out of short-term panic rather than sound logic. The Bottom Line I find myself fighting the same cycles of fear and greed that everyone else does. It’s simply a natural psychological reaction to get more pessimistic on the way down and more optimistic on the way up. Yet, letting those impulses translate to big shifts in your portfolio may result in taking too much risk near a top and being too conservative near a bottom. In addition, I always find it helpful to tune out the noise of the financial pundits who thrive on this emotional roller coaster. They don’t know anything more than you do with respect to where the market is headed and they certainly don’t know anything about your personal needs. You should be working with an advisor or managing your own portfolio with well-defined parameters that relate to your specific situation. Share this article with a colleague

Value And Momentum In Sports Betting

By Jack Vogel As noted through our previous posts, we are big proponents of Value investing and Momentum investing strategies. We even highlight the best way to combine value and momentum . However, there is a new paper by Toby Moskowitz, titled “ Asset Pricing and Sports Betting ,” which examines how size, value and momentum affect sports betting contracts: I use sports betting markets as a laboratory to test behavioral theories of cross-sectional asset pricing anomalies. Two unique features of these markets provide a distinguishing test of behavioral theories: 1) the bets are completely idiosyncratic and therefore not confounded by rational theories; 2) the contracts have a known and short termination date where uncertainty is resolved that allows any mispricing to be detected. Analyzing more than a hundred thousand contracts spanning two decades across four major professional sports (NBA, NFL, MLB, and NHL), I find momentum and value effects that move betting prices from the open to the close of betting, that are then completely reversed by the game outcome. These findings are consistent with delayed overreaction theories of asset pricing. In addition, a novel implication of overreaction uncovered in sports betting markets is shown to also predict momentum and value returns in financial markets. Finally, momentum and value effects in betting markets appear smaller than in financial markets and are not large enough to overcome trading costs, limiting the ability to arbitrage them away. Some Interesting Points The figure below explains the different price movements which are studied in the paper: The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. Here are the T-stats for the momentum betas in the figure below: (click to enlarge) The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. Analysis from the paper: A consistent pattern emerges for the Spread and Over/under contracts in every sport, where the momentum betas exhibit a tent-like shape over the three horizons—near zero from open-to-end, significantly positive from open-to-close, and significantly negative from close-to-end, with the initial price movement from open-to-close related to momentum being fully reversed by the game outcome. The patterns for the Moneyline contracts exhibit the same tent-like shape, but are less pronounced, consistent with the Moneyline perhaps being less affected by “dumb” money and more dominated by “smart” money. Then the paper shows the T-stats for the value betas in the figure below: (click to enlarge) The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request. Analysis from the paper: A consistent pattern is evident from the plots: a value contract’s betting line declines between the open and close and then rebounds between the close and game end, reaching the same level it started at the open. These patterns are consistent with an overreaction story for value, where value contracts, which measure “cheapness”, continue to get cheaper between the open and the close, becoming too cheap and thus rebounding positively when the game ends. This picture is the mirror image of momentum, where value or cheapness is negatively related to past performance, and hence the pictures for momentum and value tell the same story. (Though, recall the measures for value and momentum were only mildly negatively correlated.) Conclusion from the paper: Examining momentum, value, and size characteristics of these contracts, analogous to those used to predict financial market security returns, I find that momentum exhibits significant predictability for returns, value exhibits significant but weaker predictability, and size exhibits no return predictability. The patterns of return predictability over the life of the betting contracts—from opening to closing prices to game outcomes—matches those from models of investor overreaction. The results suggest that at least part of the momentum and value patterns observed in capital markets could be related to similar investor behavior. The magnitude of return predictability in the sports betting market is about one-fifth that found in financial markets, where trading costs associated with sports betting contracts are too large to generate profitable trading strategies, possibly preventing arbitrage from eliminating the mispricing. Our Thoughts: An interesting paper, showing that Value and Momentum work within the sports betting market, but the cost of trading on the signals is too large for profitable trades. This is probably why the “house always wins.” It’s a good thing I watch countless hours of sports to form my own “expert” opinions! Original post

Will The Labor Market Bring Down GLD?

Summary Demand for gold has come down in the past quarter. Russia and China have recorded huge losses due to their purchases of gold in the past year. But the big question will remain what’s next for the demand for gold as an investment. It will all boil down to the Fed and the timing of raising rates. The price of GLD could come down in the short run, if the NFP report shows a stronger-than-expected gain. Even though the gold market hasn’t done well this year, shares of SPDR Gold Trust (NYSEARCA: GLD ) remained nearly flat in the past month. The Fed’s decision to keep rates unchanged, the rally of the U.S. dollar and the fall in long-term U.S. treasury yields in the past month have dragged the price of GLD in different directions. The demand for gold continues to fall with Russia and China recording huge losses for their gold positions. Nonetheless, demand for gold in ETFs such as GLD will keep falling if the U.S. economy shows signs of a recovery that will bring the Fed closer to raise rates. Russia and China, among the two largest buyers of gold in recent years, have caused these countries to lose around $5.4 billion, according to Bloomberg . Russia has increased its gold reserves by more than 10% since the beginning of year. But the ongoing fall in gold prices may lead these countries to curb down their purchases of gold. In any case, gold consumption continues to fall: According to the Gold Council, total gold demand declined by 12% in Q2 2015, year on year. Most of the drop in demand came from jewelry and bars. ETFs kept selling off gold. Further, GLD’s gold hoards fell by nearly 4% since the beginning of the year. Source of data: Gold Council Looking forward, the main event of the week will be the release of the non-farm payrolls report. In the past, this report (the difference between NFP jobs gains and market expectations) tended to move the price of GLD, as presented in the table below. (click to enlarge) Source of data: U.S. Bureau of Labor Statistics and Google finance Last month, the employment report presented a 173,000 gain in jobs, which was below market expectations. And still GLD prices slightly declined. This time, the market estimates a gain of 202,000 jobs. If the report were to present a greater-than-expected gain in jobs, this could result in fall in GLD prices. The report will be among the last three for the year. And they could bring the Fed closer towards raising rates in December. If the report presents another gain of below 200,000 in jobs and annual growth in wages – which is also a concern for the Fed – remains in the 1.9%-2.3% range, as it did in the past year, the odds of raising rates will keep falling. For now, the implied probabilities for a rate hike in October remain very low at 11%; for December the probabilities are only 35%. So the market remains unconvinced about the Fed’s intent to raise rates, despite the recent speech Yellen gave, in which she stated again that she and her colleagues at the FOMC expected to see a rate hike this year. The gold market remains stagnant, as the market isn’t convinced what’s up ahead for the Fed’s policy. The U.S. dollar’s recovery, which, in part, relates to the grim global economic outlook, is keeping down the price of GLD. But, as the Fed delays its rate hike, the gold market stays put for now. If we were to see stronger-than-expected jobs report, however, the tides could turn and the odds of a rate hike could rise, which may fuel additional selloff in gold. For more, please see” GLD Continues to lose its appeal ”