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Purely by coincidence, one of the money managers I follow addressed
this issue just today.
June 6, 2005
Recession? Risks Developing, but Not Just Yet
John P. Hussman, Ph.D.
All rights reserved and actively enforced.
With job growth of just 78,000, Friday's employment report was
disappointing, but economists were right to point out that one report
doesn't make a trend.
Of course, the "one report doesn't make a trend" defense assumes that
all your information is coming from just one variable (in this case,
the monthly employment report). If you only use one variable, and it
has a certain amount of month-to-month variability or "noise," you
probably are going to need a whole series of reports (a "time
series") to isolate the true information from the random
fluctuations....
If your information comes from noisy variables like employment data,
interest rates, or stock prices, you've got a choice: a) sit in a
lotus position repeating "one report doesn't make a trend" again and
again, withholding judgment until a trend is obvious even to a blind
monkey, or b) focus on cross-sectional evidence (movements in many
variables at the same point in time) rather than just time-series
evidence (movements in the same variable at many points in time). For
instance, if you look at whole collection of very good measures of
economic conditions, and they start simultaneously deteriorating or
diverging in important ways, you don't need to wait for a whole
series of reports – you've already got enough information to isolate
the "signal" from the "noise."
As an example, a lot of mutual fund investors pay attention to the
200-day moving average of the S&P 500, defining the market to be in
an uptrend if the S&P is above the moving average, and a downtrend if
it is below. In effect, investors are filtering out the short-
term "noise" by taking the average of 200 trading days. The problem
is that following a time series of observations on a single variable
is an awfully inefficient way of getting your information. By the
time a new trend is obvious to you, you're probably not alone....
http://www.hussmanfunds.com/wmc/wmc050606.htm
It's simply not possible to "improve" one signal from one variable
using nothing but the data from that variable, and it doesn't matter
how complex or "sophisticated" the method you use. The only way to
to improve the quality of a signal is with an independent
confirmation from a different variable. On the bright side, though,
using multiple variables that confirm each other can give you more
timely information than by waiting for a time series.
Luck,
Sebastian
--- In equismetastock@xxxxxxxxxxxxxxx, "Paul Lerno" <paul.lerno@xxxx>
wrote:
> MG,
> I did an exercise on 294 stocks of Euronext using the roc10
> of MACD for stocks whos's macd was rising over zero.
> No correlation (-0.07) is found between the signal and the gains
10 d later.
> Greetings,
> Paul
> ----- Original Message -----
> From: mgf_za_1999
> To: equismetastock@xxxxxxxxxxxxxxx
> Sent: Saturday, June 04, 2005 8:47 PM
> Subject: Re: [EquisMetaStock Group] System building -
philosophical question
>
>
> Yes, I am sort of trying to dodge this as it introduces one more
> variable and one less degree of freedom - the level (2,1 or 0.5)
of
> strength. The nice thing about this approach is that you have a
range
> where you will be 'out', say between -1 and +1, and not
always 'in'
> the market. Thanks for the reply! It sounds as if you have done
this
> already. What did you use for strength?
>
> Regards
> MG Ferreira
> TsaTsa EOD Programmer and trading model builder
> http://www.ferra4models.com
> http://fun.ferra4models.com
>
>
>
>
> --- In equismetastock@xxxxxxxxxxxxxxx, "Paul Lerno"
<paul.lerno@xxxx>
> wrote:
> > Hi MG,
> > If you have a formula for strengt (?) then you van examine on a
> great sample what value of strengt is statistical
> > significant. For instance the 2%,1%,0.5% highest strengt.
> > I can examine this for the Euronext equities, but its necessary
to
> have a mesure for strengt.
> > Succes.
> > Paul Lerno (paul.lerno@xxxx)
> > ----- Original Message -----
> > From: mgf_za_1999
> > To: equismetastock@xxxxxxxxxxxxxxx
> > Sent: Saturday, June 04, 2005 11:53 AM
> > Subject: [EquisMetaStock Group] System building -
philosophical
> question
> >
> >
> > Hi there,
> >
> > This is a general, almost philosophical question, but some of
you may
> > have had to deal with it before or may have some ideas on
it. It
> > pertains to automated trading and system building. If you
build an
> > automated trading system, you often create some 'signal' and
trade
> > based on this. Now, this signal could be say the difference
between
> > two moving averages, and you trade whenever they cross which
will be
> > exactly when the signal crosses the zero line.
> >
> > When you evaluate such a system, you buy when the signal goes
positive
> > and sell when it goes negative. All of this is fairly
general and
> > fairly common. Note in this example, however, that the
actual value
> > or magnitude of the signal does not play any role - the
important
> > thing is when it crosses the zero line. Again, no rocket
science
> in this.
> >
> > I am toying with the idea to build a system based on the
*strength* of
> > the signal rather than when it crosses zero, which introduces
some
> > problems. The question really is, when do you then enter a
trade?
> >
> > One obvious way is to put some band around zero and trade
when the
> > signal goes outside of this band. This complicates matters
as you
> > also have to create this band. Another way is to still trade
on the
> > zero-line crossover, which is fine but then you could just as
well
> > stick with the original where the whole system is built
around this.
> > You could use a moving average of the signal line and trade
when they
> > cross, but this is just the same as trading a zero line
crossover.
> >
> > What ideas do you have for automatically trading a system
using some
> > signal, that are not triggered by this signal crossing zero?
> >
> > Regards
> > MG Ferreira
> > TsaTsa EOD Programmer and trading model builder
> > http://www.ferra4models.com
> > http://fun.ferra4models.com
> >
> >
> >
> >
> >
> >
> >
> >
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>
>
>
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