Shall We Play a Market Timing Game? (2018)
engaging-data.com
engaging-data.com
This mode is rigged.
Any proposal for market timing requires correlated returns. "Technical" traders infer short-term trends form patterns like the shave-and-a-haircut and lovely-lady-humps that are ultimately based on a theory of market psychology, and "fundamental" traders usually make structural observations like price-to-earnings ratios being mean-reverting.
Both of these hypotheses are excluded by construction when market results are constructed by a random draw of daily returns.
At any rate, if the market trends upward and trading is close to random (regardless of what the trader believes) then being out of the market occasionally will always be bad statistically. If there are vast numbers of traders all actually acting randomly then some will out preform others and some tiny number might out preform the market. In fact, if you have the data, you can plot the performance of every trader against the market average and actually measure how far from random the average trader is.
Maybe price to earnings ratio "should" relate to stock price. But in actuality stock price is determined by what people are willing to pay for it obviously. To the degree that people are buying and selling _not_ based on P/E, say for example they are doing so somewhat randomly, then the P/E won't reflect accurately the stock price: it won't be predictive.
These hulking paragraphs is what the demo is basically saying.
Absent any of that information, obviously you can’t guess how the stocks will move (i.e. time the market), except that they will in aggregate move gradually upwards in price as all currencies aim for inflation.
With that information, sometimes the way the market will move over a time period of years is clear. Clearly the consensus moves in a panicky way with the latest news, and constantly undershoots or overshoots real returns, but it is based on real returns in the long run.
Any proposal for market timing requires an observable x[t] that is correlated to R[t+d] for d>0. The returns may themselves lack any auto-correlation.
If market returns are auto-correlated in some way, then x[t] could be a function of R[s] for s<=t.
In the context of this game, x[t] would be some information about the internal state of the RNG at time t.
Unfortunately, if you are working with daily returns you need consecutive returns for way more than a week. You have correlated returns, in particular there are Friday-next Monday correlations that are important in the tails. You also have volatility clustering/asymmetries over daily periods (i.e. high volatility tends to be followed by higher volatility and the volatility responds differently to up vs down moves) and this tends to last way longer than a week.
It is very tricky stuff. In the real world, you will often find managers grouping based on their knowledge (i.e. X-Y was the 2008 crisis) and testing their portfolios against that. It is rather unscientific but it works (i.e. in this case, you might do something like a Markov model with a transition matrix of the daily probability of moving between volatility states, and then sample longer blocks from groups based on the state).
A simpler option (what I did) is to just look at yearly returns, and sample across countries (just using the US is horrible cherrypicking).
And technical patterns aren’t predictive.
"The market returned 214.6% during this period or 21.05% annually."
This simple math statement is wrong and makes me wonder about this website accuracy.
edit : yes this was for a period of 9 years on the market which should be around 9% annual returns instead.
> edit : yes this was for a period of 10 years on the market which should be around 8% annual returns instead.
How did you get a period of 10 years? It runs in 3-year increments.
Just a prognostication on my part, it's worth exactly what you paid for it.
We'll also see hyperspecialization towards COVID-19 in the health sector, which could leave those industries vulnerable when COVID-19 finally runs its course(likely many months from now).
Some industries are already failing, and will need propped up. If not, then those industries will take awhile to recover after COVID-19 runs its course.
Also I'd be incredibly wary of huge single day gains. Consistent slower gains is a better sign of a healthier economy than the spiky behavior we've seen as of late indicating people are heavily speculating on the volatility.
"Systemic"; what does that even mean? That the crisis was related to the financial system? Yes, it was one type of financial crisis.
We are now in another. If you believe that the unravelling we are seeing is simply because of the Coronavirus, I think you will be disappointed. While this may not be the same as 2008 (no two crises are the same), there are a number of "systemic" issues in the world that will come under pressure:
- Privately held companies with ridiculous valuations (WeWork, SpaceX)
- China having taken on more debt in 10 years than anyone, ever
- Negative interest rates around the world going *into* recession
- The shale industry blowing up
- Housing bubbles that didn't implode in 2008 (Canada, Australia) coming under pressure
- Fiscal and monetary stimulus in the US like we've never seen
- Risk Parity unwinding
You, you can absolutely "time the market". You just can't do it exclusively based on the chart. The real world is still there, and it's important, you know? And Stock Market and savings accounts are not the only investment instruments available to people. And you don't have to be all in or all out.
Maybe if you don't have time and skills to think about it, etc. then this makes you feel better about your "investments" because "there was nothing you could have done better". But it's still load of rubbish.
Are you suggesting there’s more money in the market of selling index funds than there is in the market of selling you the idea that you can beat the index? Because I’ve got news for you...
> You, you can absolutely "time the market". You just can't do it exclusively based on the chart. The real world is still there, and it's important, you know? And Stock Market and savings accounts are not the only investment instruments available to people. And you don't have to be all in or all out. Maybe if you don't have time and skills to think about it, etc. then this makes you feel better about your "investments" because "there was nothing you could have done better". But it's still load of rubbish.
There have been countless studies done about this, and countless fools who tricked themselves, like scratch off players and gambling addicts, who think they’re winning. It’s exceedingly uncommon for investors to beat the market over 10+ year periods.
I believe we are near a short term bottom and will bounce in 1-2 weeks. Most of the bad news is out and I expect better news in the coming weeks (quarantine is working, remdesivir/chloroquine is effective). Then I predict after the short bounce that the economy is so damaged that we make new lows
I’ve been timing the markets for 20+’years now. Just because some people can’t doesn’t mean that everyone can’t.
It'll be at least 2 weeks evem before testing capacity is ramped up enough to measure population-level success at quarantine
No, assets under management is irrelevant to price discovery. Trading is what sets prices not holding stocks. According to a 2018 Vanguard paper index funds only made up around 5% of trading volume despite holding about 50% of assets. So active managers are still responsible for 95% of price discovery even if they hold only 50% of assets.
My opinion is that buying and holding the index is better than picking stocks and timing the market unless you are a professional (you need to be doing it full time to gain a consistent edge, and even then it isn't guaranteed). However, even then, it is only good advice if equities is a small part of your overall portfolio. Blindly buying and holding the index is not smart if your net worth is 80% tied in equities -- you should diversify in bonds, real estate, precious metals, and other commodities.
[0] https://en.wikipedia.org/wiki/Japanese_asset_price_bubble
Only going for equities is risky I agree, but I don't see this as an ETF problem.
That's because the only actions you can take in the game are "buy the index" and "sell the index".
As soon as there's more than one price in the market (even, say, one index tracking DJIA and another one tracking S&P 500), it's possible to beat the market average while prices are rising.
I'm not saying you can do it without knowledge of the future. I'm responding to the (correct) observation above that it isn't possible to beat the market average while it's rising, no matter what you do, even if you do have knowledge of the future -- as long as the only options you have are "buy the index" and "sell the index".
I don't get why is beating the market a goal, isn't making money the goal? I am much happier making 20% while market is up 30%, than losing 5% when the market loses 20%.
Add in some information like ‘a new pandemic threatens to shut the world economy for months and kill tens of millions of people’ and suddenly this changes.
A pandemic is an edge case... However, markets react much more quickly than in the past (algorithms, global data, instant analysis of that data) - that technical analysis short term timelines have compressed.
If you want statistical breakdowns of each pattern, their movements, and outcomes - this book is a great reference. https://www.amazon.com/Encyclopedia-Chart-Patterns-Thomas-Bu...
Trading off data and patterns is a valid strategy, but the book you referenced doesn’t show you how to do that. (drawing pictures over charts and making subjective conclusions based on what you drew is not a data driven strategy).
Read the recent book on Rentech (the man who solved the market is the title I believe) to better understand how difficult it is to actually beat the market using data.
Once you read about a firm who has consistently beat the market—-and how tiny their edge actually is—-you’ll put the notion that you have the resources to do so on your own to bed.
But this game really just proves that you can't time the market while knowing nothing about the outside world.
Headlines sometimes matter.
Not all the time. Talking heads generally overstate how much one random speech matters, "politician X says Y, therefore stocks are reacting" is generally just over-analyzing noise. It's annoying to see post hoc rationalizations the norm in financial... in all news. People claim causation for anything they happened to read.
But occasionally, once a decade, say? Headlines do send a strong signal. "Crisis on Wall Street as Lehman Totters" was a headline that came just before the biggest cliff in 2008.
In February 2020 we didn't know as much as we do now, but people already started talking about difficulties in containment. China--which likes itself some economic growth (if only to keep the Party going)--decided a near total economic shutdown was necessary. The virus was already in a few dozen countries and Singapore was surrounded by container ships that couldn't dock.
So let's split out two separate claims:
1) The weak efficient markets hypothesis: you can't time the market blind.
2) Strong EMH: you can't time the market, not even once in a while, with your eyes wide open.
In defense of (2), the housing crisis really started in October 2007, and ended in February 2009. You can delve for headlines for those moments, but they are way more specious. Here's the real test: what will be the best signal of the rally after the pandemic?
1) China hitting zero active cases, reassuring the world it can be done.
2) Global new case "growth rate" below 1 for two straight weeks? [Growth rate being the ratio of today's new cases to yesterday's new cases, with lower than 1 a tipping point away from exponential growth, and probably the halfway point in the crisis.]
3) China keeping no new local cases even after reopening its economy?
4) Some decision about how to keep airlines solvent?
5) Unemployment nearing historical normals after skyrocketing beyond anything we've ever seen?
Any of these seem plausible. But who knows which will be right? However, if we are attacking strong EMH, we don't really have to time things maximally, we just have to do slightly better than the index. So maybe just wait until the S&P 500 has recovered a quarter of its losses and get in then?
Maybe the general problem with active investing is the financial sector's approach: hire people to study market signals full time and generate algorithms that can trade more and more actively. Full time people are expensive, and tuning algorithms is expensive. So that means you burn through fees (on top of probably not outperforming the market, because you're competing against noise).
If you hire people to do something full time, they will find ways to justify their time. If you hire someone to play rock paper scissors full time, and give them some of the highest bonuses in the world, they will come up with some very nice models. And usually not outperform a random thrower, but give you lots of reports on why and how they'll do better next time.
But if all the daily signals are noise except for one really blaring foghorn once a decade, maybe the better solution would be to hire a part time market hobbyist on a contingency fee. "Hey, if you see a signal that the entire market should be shorted, maybe short the market. You get two trades per decade max. Otherwise, just index and hold."
Probably also wouldn't work, but I really like the idea of some plumber in Poughkeepsie controlling billions of dollars in hedge fund money, you know, just as a side hustle.
It's impossible to time the market perfectly every time because that would imply perfect knowledge of the moves of all the participants. By the same token, it's impossible to mis-time the market every time, because then you could just take all the opposite moves and you're back to winning. It is possible to win more than you lose, not by being the smartest, but simply by being smarter than the average participant. Which, thanks to companies like Robinhood putting trading capability into the hands of any naive smartphone owner, has become easier than ever.
Until then, there's always the prospect of resurgence of the virus once restrictions are lifted, and that will keep the lid on the markets.
If there's strong news of effective treatments in the short term, that may kick off a sustained rally soon.
Of course the other things you mention are very valid too and will have positive effects, and may be "the one".
When people start worrying that there is a new bubble. :-)