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Guy,
My systems/methodolgies have been experiencing similar phenomena for the past
few months. Not only my interest rate basket vs S&P but also across other
instruments too.
I trade a broad range of markets around the world and at any one time will have
positions in up to maybe 15 markets. My systems use the inter-relations between
instruments not only for signal confirmation/divergence but also for
risk-measurement. These changes that I have observed have not (yet?) reached a
level where they have turned a profitable methodology into a losing proposition
but my measures of profitability have decreased somewhat with increased PnL
volatility.
Like you, I am still exploring what these fundamental changes are that are
transpiring and how best to capture these within a methodology without
re-optimizing parameters.
I am also noticing a marked shift in profit contribution from my various
systems: My trend-following systems have improved in performance at the
detriment of my counter-trend systems. Up until recently my portfolio risk was
approximately 70% trend-following and 30% counter-trend. I have now upped my
trend-following risk to 85%. This has increased some measures of profitabilty
and also dampened some the previously mentioned increase in PnL volatility.
Regards,
Essan.
Guy Tann wrote:
> Has anybody else noticed a decoupling of the T Bonds and equities? Our
> trading system has used the Bonds to confirm our S&Ps trades for the last
> twelve years with great success. In the last month or two, I've noticed
> that Bonds seemed to have decoupled from the equities market and that we are
> better off trading our basic S&P system without Bonds confirming.
>
> Is this a temporary decoupling of Bonds and equities caused by the Asian
> economic crisis or is it more permanent in nature?
>
> Is this the beginning of the end of the bull move???
>
> Pro:
>
> Asian crisis. Possible collapse of Far East financial infrastructure.
> Asset deflation. Commodity price decline. Earnings impact on US firms
> caused by the aforementioned Asian problems as well as loss of export
> markets (dollar inflation). Too much money (401k, etc.) chasing too little
> quality. Equity prices discounting not only future earnings but the
> hereafter.
>
> Con:
>
> Lack of final blow off to the upside. Falling interest rates (Asians
> chasing US Bonds). Fairly stable economy and competitive US edge due to our
> already having gone through our own financial upheaval (S&L crisis, etc.)
> and industry restructuring (reengineering) during the last decade.
>
> I'm sure there are tons of Pros and Cons that I'm too lazy to think of and
> that's why I started this thread. I'm also sure that some of you have
> spotted other indicators in your trading that I would never see, just due to
> the fact that I only trade S&P futures and never look at Bonds, equities,
> options, LEAPS, foreign markets, etc..
>
> This recent Bond/Equity relationship change has made a major impact on our
> trading results. In the last 6 weeks, our trades without Bonds are 77%
> more profitable than using the Bonds. In the past, coupling Bonds with our
> S&P trades has made the difference between a profitable year or a losing
> year. What worries me is that maybe this isn't a new trend, but simply an
> aberration. Simply a point discontinuity or as one of my kids would say, a
> flea on an elephant's butt. Currently, we're still trading using the Bonds
> to confirm. I'm watching our S&Ps with and without the Bonds, and I'm now
> getting ready to switch over to ignoring the Bonds. However, I'm really
> nervous reacting to a 6 or 10 week 'trend' versus our twelve years of
> experience.
>
> Any ideas or thoughts would be appreciated.
>
> Regards
>
> Guy
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