Do Nothing - November 2, 2011

[Billy]

Forum Clusters 111102.xlsx

The robots are currently playing their role of capital protectors by staying neutral in cash. Making money on high probability setups will come later, perhaps on the short side next.

Even my personal discretionary research tells me to calm down as the macro and technical big picture becomes foggier than ever!
Billy

[Andrei]

Billy,

Offtopic but, have you ever witnessed a major bull market with small caps underperforming large caps? I'm trying to determine, if small caps out- or under-perfomance has any implication for price direction (on long timeframes).

Thanks a lot.

[Billy]

Billy,

Offtopic but, have you ever witnessed a major bull market with small caps underperforming large caps? I'm trying to determine, if small caps out- or under-perfomance has any implication for price direction (on long timeframes).

Thanks a lot.

Andrei,
It depends on the timeframe you are looking at, but in general, small caps are outperforming in uptrends and underperforming in downtrends. On timeframes lower than the 30-minute, I find the relative strength to be much erratic and without consistent predictive power.
The higher volatility is caused by the lower liquidity and limited hedging possibilities for individual stocks. Hence, sustained improving relative strength hints at growing risk-appetite by investors. Divergence or convergence of highs and lows between IWM and its RS line (vs. SPY) on the 60-minute or daily chart have often helped me well in my discretionary decisions.
I must insist that Pascal has backtested some of my ideas on IWM relative strength with the robot in mind and no reliable edges could be found.
Billy

[EB]

Andrei,
It depends on the timeframe you are looking at, but in general, small caps are outperforming in uptrends and underperforming in downtrends. On timeframes lower than the 30-minute, I find the relative strength to be much erratic and without consistent predictive power.
The higher volatility is caused by the lower liquidity and limited hedging possibilities for individual stocks. Hence, sustained improving relative strength hints at growing risk-appetite by investors. Divergence or convergence of highs and lows between IWM and its RS line (vs. SPY) on the 60-minute or daily chart have often helped me well in my discretionary decisions.
I must insist that Pascal has backtested some of my ideas on IWM relative strength with the robot in mind and no reliable edges could be found.
Billy

Also, as Billy has noted before, the number of small caps has shrunk dramatically over the past five years, so there are few components from which the small cap indexes can choose. A long term backtest of relative strength would need to consider this likely source of non-stationarity.

[Billy]

Also, as Billy has noted before, the number of small caps has shrunk dramatically over the past five years, so there are few components from which the small cap indexes can choose. A long term backtest of relative strength would need to consider this likely source of non-stationarity.

Excellent reminder, Bob.
Let me also recall that the IWM robot was chosen instead of a SPY or QQQ robot because the small caps’s higher beta led to a long term risk-adjusted return more than twice superior with a correlation close to 100% with SPY and QQQ. The RS advantages of small caps are therefore actually integrated in the IWM robot itself. It works so well only because of Pascal’s advanced and sophisticate market direction components of the robot design. If it was not the case, the robot could only underperform.
Billy

[Andrei]

Thank you Billy and Bob for very informative answers!

[adam ali]

Billy,

I know Pascal has been out today. Any sense of how money flow is looking, given we're in the last hour?

Thanks.

[adam ali]

Billy,

Of course, after writing my question I now see Pascal is back and updating the 20DMF page. So no need to respond unless you care to.

[lulzasaur]

from the MF so far..it looks like the robot will issue a sell signal by the close?

[Billy]

Billy,

Of course, after writing my question I now see Pascal is back and updating the 20DMF page. So no need to respond unless you care to.

It has just been updated (slightly negative at 14:56)
Billy