Market Update 1.30.11

Last week we were concerned that the US market would drop and volatility would rise as our agent-based indicator had risen above one. We forwent buying the VIX future and purchased a VIX call option last week. On Friday the VIX rose 24 percent, its biggest daily percentage jump since May 20.

It is always interesting to compare our most recent data to historical data. If we go back to 2006 the first time the US agent-based indicator rose above 1 was January 22nd, 2006. It then decreased until the second week of February and rose back over 1 until the end of May where the market was poor for the next three months until rising back over the last quarter. It is difficult to compare to the past because we believe the markets are faster in processing information. Therefore, one year in 2004 is similar to six months in 2011 if comparing those two years. However, it does give us some insight as behavior in markets never changes, only how the magnitude. Even so, we do see similar events occurring this year as the US market has increased significantly over the last two years and our data suggests that once the agent-based indicator rises above one it takes time before it can really drive above 1. We plan on seeing more than a couple of weeks of downside movement sometime during the year.


Our other measures are continuing to suggesting shorting certain emerging markets. Our short-term indicators are way over their threshold for India, Turkey, Thailand, and Indonesia. Markets that are coming up near their thresholds include Chile and Malaysia.

Even so, we do like Chile and Malaysia for the long-term but the short-term dynamics do not look good for these markets.

For our long portfolio we have sold out of the markets where we do not like the short-term dynamics as mentioned above and are keeping the ones we like such as Russia, High yield corporate debt, mexico, korea, and commodities. For our long-short portfolio, we are currently in a net short position with an open call option position on the VIX. We plan to stay net short for the next two weeks in February unless we see any significant changes in the model.

1.23.11

We are at an interesting juncture right now according to our agent-based measures. Again we use two measures. The first measure determines exit and entry points as well as which markets to overweight and underweight. The agent-based measure predicts short-term dynamics in the financial markets. The BFIA agent-based measure has crossed 1 for the first time since 2007. This means the US market is now fairly valued. In order to increase beyond one the US market must correct. We therefore predict short-term volatility ahead. In addition, looking back at our historical data the first time this measure hit 1 after the tech crisis was January 22, 2006. We believe we will see similar dynamics from that time period. This means that the US market will experience some downside volatility over the last week of January into the month of February. We have therefore closed all positions and will long a futures contract on the VIX. We are bullish on the US over the 2011 year including other markets such as Russia, Korea, South Africa, and Chile which are energy and commodity plays. Once the agent-based measure departs from the 2006 measure we will then close that position and continue to long the markets we favor as noted above. Let us see what happens this week and into February.

Market Update 1.17.11

Recap from last week. We were bullish on Russia and bearish on India. For the week India, INP, fell by 5.9% and Russia, RSX gained 6.4%. Not bad for a week.

Last year our indicators were extremely bullish on all emerging markets and did not favor developed markets at all. This year our indicators are signaling to specific emerging markets and favoring some developed markets. Based on our indicators here are the markets we are long:

1. South_Africa
2. Mexico
3. Korea
4. Malaysia
5. Russia
6. Chile
7. USHY
8. Israel
9. Natural Resources
10. Thailand
11. Canada
12. US
13. Turkey
14. Indonesia
15. Japan

Are indicators are signaling to hedge completely or short:
India
US investment grade bonds
Indonesia
Turkey

India, Indonesia and Turkey are markets we like for the long-run, however, our model suggests that we hedge these positions for the short-term.

01/09/11

Our agent-based measures now view the US market as fairly valued. We do predict the US market will increase slightly over the year, however, we do not see any more major upside as the market is currently fairly valued. One market we see as under valued is the Japanese market. We are reducing our exposure to gold now as we see the past volatility as a sign to reduce exposure and re-allocate to natural resources instead. We still see warning signs in India which also applies to other Asian markets as they are highly correlated. We will keep our exposure net zero until we see improvement in our measures. One market that was in the bottom of our list and has risen toward the top is Russia, RSX. We are now bullish on Russia, more so than the other BRIC countries.
We still like certain key markets such as:
Mexico, Malaysia, and Korea.