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.