A WORD ON MOMENTUM…
Along the lines of “the trend is your friend…” – GMO’s quarterly update (which I’m a little late reading) contains insights on momentum investing, which seems to be all the rage these days as markets are either all in or all out in either direction:
“One of the fundamental risks in running a price-based stock selection metric like momentum is the possibility that market themes can shift quickly and leave you holding a portfolio full of the last theme’s stocks. Momentum metrics experienced such a fate in mid-2011, when the flight to safety left them holding significant exposure to firms levered to rising commodity prices. As investors sold off riskier, more economically exposed companies amid the Europe-induced spring sell-off, momentum lagged.”
To me, price is always the most important element of any investment approach, but true trends are not made up merely of price, but of macro and micro trends. Finding those trends is easier said than done, but the momentum of price, as chartists often use it, is merely a representation of a fundamental macro or micro trend (I often say pure chartists are just lazy fundamental investors!). When you can understand the monetary system, the macro and micro drivers of the system and a way to benefit from the way this is all intertwined, only then have you found a truly sustainable case of momentum.
Here is a couple of timely post on momentum
http://macrostory.com/2012/02/13/morning-brief-monday-february-13-2012/
http://macrostory.com/2012/02/10/cftc-cot-report-february-7-2012/
“contains insights on momentum investing”
All the insight you need to know: The autocorrelation of stock price shows pure noise.
That momentum thing you think you see? All in your head.
Hi Cullen – I am a longtime lurker, have been mainly reading some of your pieces on MMT… But this post piqued my curiosity… Are you claiming that you “can understand the monetary system, the macro and micro drivers of the system and a way to benefit from the way this is all intertwined”? I’d certainly love to hear more detail, if so… Not sure if you have read the research by Asness et al., about Value & Momentum – that is perhaps one of the micro drivers of the system, but I haven’t heard much about the monetary system or macro effects. Would you care to expand on the topic? Or have you elsewhere already? Thx.
Hi JT,
I’ll touch on this in a future post. Stay tuned.
Cullen
I’m very interested in this as well.
It’s been educational watching prices react to what people believe will happen, and then to what actually happens. QE2 was a prime example. There is RAMPANT misunderstanding of the drivers of macroeconomic systems, which creates inefficiencies in security pricing. I’m currently looking into building an algo focused on this.
I agree with your take on things, Cullen, but there are some really good pure technicians who have no problem making money. They’re probably not lazy- just gotta stir it up, don’t ya?
I’ll take a good technical trade myself on occasion. I’m in one now on bac. Anyway I’ve always felt that the biggest difference is how well people react when they’re wrong.
If this is not a sign of a market top I don’t know what is!
http://blogs.marketwatch.com/cody/2012/02/13/greece-and-the-euro-crisis-jump-the-shark/
http://blogs.marketwatch.com/cody/2012/02/13/greece-and-the-euro-crisis-jump-the-shark/
You want big risk? Look at the parabolic move in Apple!
Cullen, related to the above comments and this article, and as an example of how you eat your own cooking, broadly-speaking what % of your algo is technical/price/trend focused?
Cullen,
Are you thinking something along the lines of Ray Dalio’s Economic Machine. When I was reading his “Template for Understanding”, I couldn’t help but reflect upon the value of MMR and sectoral balances as a core foundation for any approach. Interestingly, reading his expanations of monetary systems, it seems he would strike odds with MMR quite often – and yet his investment results are stellar.
Anyway, looking forward to posts on Cullen’s Template for Understanding.
Hey Kyle,
Dalio’s got a few decades on me so my template for understanding is still a work in progress!
Price is what you pay, but value is what you get. Perhaps I am old fashioned but I will take value over price any day, twice on Monday through Friday.