Counter-intuitively when all news is bad news, it becomes good news. After receiving series of negative news both substantial and not, the market suddenly rebounds with the expectation that Federal reserve will further cut interest rates at the end of October 2019.
As it is now, it seems the market is trading with a narrow band of USD300 and USD290 for the SPY
From Sujit on trading
- not necessary to get numbers further back than six months
- stock market subjected to fractal distribution
- it is possible to generate returns of up to 140% per year by trading on stocks that are moving within a range
- going all in on each position each time leads to a very low Sharpe ratio
- Sharpe ratio should be calculated separately for method and for SnP benchmarked against US treasury interest rates. The difference is the actual returns
On Rambo Last blood
A movie is a reflection of the culture and attitude of an age. Rambo was a very popular cultural icon during the eighties and the early nineties when memories of the Second World War and the Cold War against the communist were still very fresh in the minds of the people in America.
If you looked at the world today through the eyes of someone like Rambo, you would have been able to easily draw facts to back the narrative painted by Trump prior to being elected president.
When operating in an environment of uncertainty, a decision maker formulates multiple often competing narratives in the head that best explains majority of the facts presented. He calibrates the weightage assigned to the probability of each narrative as new pieces of data become available. He simultaneously utilizes multiple ones that are assigned high plausibility in his decision making to strive for the best possible expected outcome . It is a cognitively demanding iterative activity that goes on indefinitely.
- common themes between movie and Trump’s narrative
- Mexico drug cartels
- Mexico prostitution rings
- The world is a dark place
- illegal border crossing
- poor border fence
- white male
- Rust belt
- Protagonist is in his 70s
- Freedom fighter who fought the communist in Vietnam and Russia
- guns and lots of blood
- man of steel
- manifest destiny
- Cognitive biases
- Narrative fallacy
- Framing bias
- selective bias
- Expert political judgement, Philip Tetlock
For us to be able to successfully apply artificial intelligence on any domain, the following needs to be true
- The behavior the system to be modeled must not be stochastic
- The state of the system must be decipherable by the data scientist
- it should be possible to understand the state in which the system is at through interpretation of data gathered
- The domain can be modeled
- the parameters for modeling the domain must be well defined
Only when all three premise are true can we determine where the adjustment should be made when a model fails to predict an outcome
The financial markets is stochastic in the short run.
The underlying parameters are constantly changing and thus hard to model due to the emergent nature of impacts caused by human activities. The data is qualitative and thus hard to convert into clean quantitative datasets.
While the price movements are obvious it is hard, it is hard to attribute impact to the various parameters.
As such, it requires human neural networks that consumed all these qualitative data to perform the prediction/decision making.
Chain of events and decision making
The decision making processes from June 2019 after the federal reserve signal likelihood of cutting interest rate leading up to the 2019 August downward mean reversion of the SnP.
19th June 2019, Federal Reserve signals for first time likely decrease of interest rates
Federal Chairman expresses concerns about potential cross winds caused by US trade policies and its impact on their dual mandate.
10th July 2019, news paper reports SnP reaches all time high
SnP on the cusp of crossing 3000 threshold for the first time to an all time high. Market is euphoric. Trade issue between US/China yet resolved but discussions are underway.
Short positions SQQQ and SRTY were utilized as hedges against downward macro environment reversion risk when the SnP extended beyond 3000 to reach an all time high
1st August 2019, US announcement of 10% tariffs on US300 billion imports from China starting September 2019
on 1st August, 24 hours after actual interest rates cut, Trump signaled 10% tariffs on USD300 billion Chinese import. SnP dropped.
Exited SQQQ and SRTY for 10% capital gain after reaching 30SMA and 50SMA range. Net combined loss to portfolio was 0.5%. Left remaining long positions open.
4th August 2019, Chinese response
On 4th Aug 2019, China’s exchange rate dropped for the first time below 7RMB/1USD.
5th Aug 2019 trading day
On 5th Aug 2019, China announced they will halt all imports of agricultural goods from US.
Portfolio continued declining an additional 2% on the trading day of 5th August 2019.
Closed all long positions with the exception of REITs
- Value shares
- Growth shares
6th Aug 2019 trading day
On the evening of 6th Aug 2019, China announced decision to control fluctuation of RMB exchange rates to USD
Bought into TQQQ and URTY at below 30SMA and 50SMA
7th Aug 2019 trading day
TQQQ and URTY automatically exited at the mid point between the two following highs and lows:
- highest point before Trump’s tariff announcement came into effect
- lowest point after China’s halt on US agricultural imports and RMB/USD breaking 7 came into effect