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A lesson I've learned from 2003 is that the mother of all indicators is
probably liquidity measurement. For example, the ROC of a steepening yield
curve or the profitability of carry trades. Such indicators have overridden
all others--fundamental to momentum--and under weighing their importance has
been expensive in terms of missed opportunity, for me at least.
I'd like to discuss the development of a market direction indicator that
consolidates a few variations of implied liquidity measurement (ILM for want
of a better name). Along with other (proprietary) indicators I believe an
ILM could substantially improve recognition or corroboration of opportunity.
As an exercise, it would be interesting to read feedback of a system that
buys an index when it's below trend and when the yield curve is rising, and
the inverse. You should find it profitable although any strategy ought not
be limited to just ILM, but it should be a worthwhile leg to a virtual
spread, for example.
Given that the idea of ILM has validity, I'd like to discuss (on the list) a
number of ways that liquidity may be measured. For example, the correlation
of Moody's Baa bond rate divided by the FF plus a point or
two--Baa/(FF+1.5%). The higher the number, the more profitable a carry trade
that quite a number of hedge funds trade.
Hope there are a few of you that also find this interesting :)
Colin West
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