Aside from trading, I am considering now placing a hedge against
my long term long holdings. Would you do SH (S&P short)
or SPY Short?
SH pays a quarterly dividend of 1.39%, but does it decay
deteriorate (nightly or weekly) due to lost time value of futures
and options underneath? KEY QUESTION HERE.
SPY short would mean I would have to payout the 2.06% dividend
quarterly. Hence, I am leaning SH. Thoughts?
Decay deteriorates?
SH Question #2 - do they just short SPY for you? or is it
comprised of complex derivatives, futures, and options? How
do they pay you 1.39%?
“We’re now at plus 7.2% on the S&P short-range oscillator.
That’s the one I swear by,” CNBC’s Jim Cramer said. “Anything
above plus 5 is overbought. A 7.2 reading makes me concerned,” the
“Mad Money” host said. This is the one that "called the bottom"
when it "fell to the minus 20s in March,” he explained. “We’re now
at plus 7.2% on the S&P short-range oscillator. That’s the one
I swear by. “Anything above plus 5 is overbought. A 7.2
reading makes me concerned.”
I get stopped out 2/3 times on these like: APT and GBTC. I
think I have a pretty generous wide stop larger than 150% of the
biggest pair of candles, but obviously, not wide enough???
What am I doing wrong. Is there a rough formula to
compute wide stop, or just go naked until it gets steam upward?
First example of "restart" not that easy - Hard Rock Hotel Chain
reopened major nice hotel 3-4 weeks ago, and only 12% occupancy
“We reopened the Shenzhen Hotel, obviously [in] a global city in
China. Beautiful property. Occupancy is right now at 12%. We’ve
been reopen for a good 3½, almost four weeks,” he said, citing the
Shenzhen property as an example of the tough road ahead that other
parts of the world may face in restarting their businesses.
Allen said that tourism, which has been decimated by the
Covid-19 pandemic, supports the Hard Rock Hotel Shenzhen as well as
other international properties. “If you look at the Hard Rock Cafe
in Times Square [in New York City] it is tourism, a restaurant that
does $50 million in actual sales, that’s all tourism. ... London is
tourism. ”
Hard Rock expects its casinos, hotels, restaurants to take a
year to recover after they reopen
Best Way to Play Gold Up? Too many options to pick
from. What is the best way to play just price of gold WITHOUT
influence from ETFs and Mutual Funds....? (and not futures
contracts, commodities, or options)
NOT A COMPANY, MINER, or stock influenced by ETFs, IWM, SPY,
Mutual Funds,.....
Some other issues are emerging this morning as the collateral
damage being done is in the early stages of being tallied.
Yesterday, the Financial Times reported that a Singaporean
trader hid some $800 million in losses from oil trades gone sour.
His counterparties include HSBC, Société Générale and ABN Amro.
On Tuesday, there are reports that South Korean investors have
recently loaded up in structured notes tied to the price of crude
and are likely suffering large losses as the result of yesterday’s
historic crash.
Add to that, the likelihood of additional, and large, losses
among hedge funds, domestic holders of leveraged oil
exchange-traded funds, highly levered oil producers and a coming
wave of bankruptcies among those same companies and the damage done
to oil markets is far from over.
ETF marketers are already suggesting they may, or will, halt
trading in them or possibly liquidate them, causing a further
cascade in the price of oil.
In history, there are parallels but no precedents.
In 1986, then Saudi Oil Minister, Sheikh Ahmed Zaki Yamani,
decided to punish OPEC members who were not abiding by the cartel’s
daily production quotas and taking market share from the
Kingdom.
To enforce discipline, the Saudis flooded world markets with
crude, driving the spot price of oil to just below $10 per
barrel.
The damage to oil producing nations, including the U.S., was
severe. Cities like Houston, Dallas, Oklahoma City and elsewhere
closed up shop, with large and small oil companies capping wells
and going bankrupt and/or merging.
Marie Kondo can make 37 pairs of shoes disappear, but she can't
stuff millions of oil barrels into a wicker basket. There's just no
place to store the stuff.
Some traders are sending barrels on a leisurely cruise aboard
very large crude carriers (literally, VLCCs). "Many traders are
betting that the coronavirus pandemic will run its course and
demand for oil will jump later this year," the
WSJ explains.
Six-month VLCC leases have risen to an average of $100,000/day
from around $29,000 a year ago.
Sounds steep...but companies that have the liquidity and
capacity could make ~$16 of profit per barrel after storage
costs.
Well, funny, I was playing a small range of SPY at 5:30 CST and
saw a HUGE spike in volume (10-20-30 times), one bar passed, no
real change, another bar passed, no big change, I am thinking
"something big is happening I do not know about..hum..danger?", I
was long two good size positions, they then hit my two higher
targets, I am out, happy, and one more bar, and BOOM skyrockets.
Oh well. Made $163 instead of $1,630.
BUYERS - Who the heck are the Buyers? I know this is a
fundamental question, in a technical forum, but... who the heck are
all the buyers when the news and outlook is horrific. I just
do not understand. Any insights from anybody?
Possible Explanation for Rally (again the markets are 60+% moved
by balancing of Passive ETFs and Funds)
From Analysts:
"The Great Equity vs Debt Rebalancing After QE4ever.
Many institutional money managers and funds were unable to
capitalize on what they saw as a buying opportunity after the GVC
depressed the S&P 500 following its February 19 record high.
In particular, balanced funds couldn’t take advantage of the
great opportunity they saw to rebalance away from bonds and into
stocks because the bond markets had frozen up, making it impossible
to raise cash by selling bonds.
That all changed on March 23. We noted that institutional
investors rushed to sell their bonds to the Fed and used the cash
to rebalance into equities. We think investors still have plenty of
bonds to sell to the Fed, which will bring in cash with which to
buy stocks. That would support our belief that the bear-market
bottom was made on March 23. "
I personally do not believe we are out of the woods, and expect
a steep drop soon, but not putting any more capital to that!
Individual Stocks Now Move 60% With The Market These days,
NOT ON THEIR OWN MERITS!!
(i.e. you cannot trade on the merits, fundamental or technical,
of a particular stock, unless you were to hedge out 60% for all the
ETFs that hold that stock.)
(this is due to Passive Investing, Algos, and ETFs)
I have reread this great article 3 times. Indeed, I can
clearly see this - Passive Investing and ETF are so dominant, that
individual stock CANNOT MOVE INDEPENDENT OF "The Market". I
think this applies both Technically (for this group) and
Fundamentally (for investors). I see this more and more
every year...no matter what the technical setup is on an individual
stock, the Passive Investing and EFT Market movements dominate.
It does not seem to matter (as much) any more if a stock is a
complete dog (losing money, no cash flow, declining sales, high
debt,....) it will go up with the market. It does not seem to
matter (as much lately) if a stock has a perfect bull flag, inverse
head and shoulders, support level,.....the "market movement" will
dominate. Very frustrating.
Policy in a World of Pandemics,
Social Media and Passive Investing
The behavior we are
seeing in public markets is not a signal of collective decision
making, “the wisdom of crowds” or the Efficient Market Hypothesis
at work. Instead, it’s an indication of a market that has
been twisted into a shadow of its former self by two forces –
passive investing and synthetic attempts to generate yield by
systematically selling volatility. This should not be a
surprise. Using the words of John Bogle himself:
“If everybody indexed,
the only word you could use is chaos, catastrophe…The markets would
fail.”
– John Bogle, May 2017
Over the past 25 years,
we have experienced unprecedented growth in passive investing.
Most Americans and market participants are unaware that this
has become the primary mechanism by which investments occur.
Regulatory changes, heavily influenced by the lobbying
activities of Vanguard and Blackrock, have led to an inexorable
flow of capital towards passive investing. Today, more than 100% of
gross flows into the stock market are passive (meaning
discretionary managers are facing gross redemptions) and nearly 85
cents of every incremental retirement dollar now flow into a target
date fund. Roughly half of all 401Ks hold a target date fund as
their sole security.
The theory behind passive
investing relies on a very simple concept, the Efficient Market
Hypothesis, which posits that current prices reflect all available
information. As a result, trying to “beat the market” is a
fool’s errand and investors should simply try to passively
participate. Unfortunately, the assumptions behind passive
investing are critical -- no transactions costs, costless
information, homogenous expectations, and perfectly rational
investors. These do not hold in the real world.
The arguments for passive
index investing over active investing received a further shot in
the arm from a simple thought exercise by William Sharpe in 1991,
“The Arithmetic of Active Management”. Again, Sharpe’s work
is seductive in its simplicity:
If "active" and "passive"
management styles are defined in sensible ways, it must be the case
that
(1) before costs, the
return on the average actively managed dollar will equal the return
on the average passively managed dollar and
(2) after costs, the
return on the average actively managed dollar will be less than the
return on the average passively managed dollar
This observation set the
stage for a revolution in investing with fees for managing assets
collapsing over the last three decades. These declines have
taken the form of reduced annual fees, reduced sales load fees and
reduced commissions. This appears to be the ultimate free
lunch for investors; but what if the assumptions are wrong?
Looking closely at Sharpe’s work, it is clear where an error
lies:
A passive investor always
holds every security from the market, with each represented in the
same manner as in the market. – Sharpe,
1991
There is a key assumption
within the articulation that the investor holds the market
portfolio. How does the investor get in? Apparently magic.
How does the investor get out? This would also be magic.
These assumptions were successfully challenged in a 2016
paper by Lasse Pedersen, “Sharpening the Arithmetic of Active
Management” where the author noted that changing index construction
requires passive participants to trade. Pedersen’s work, however,
did not go far enough. As the above flows charts highlights,
“passive” investors are forced to trade every single day due to
incoming flows. Each new dollar invested into passive index
funds must purchase the securities in the benchmark index.
These purchases exert an inexorable influence on the
underlying securities. Per Sharpe’s own work, these are not
passive investors – they are mindless systematic active investors
with zero interest in the fundamentals of the securities they
purchase.
If incremental investor dollars were increasingly flowing
into market capitalization indices, we would expect to see two
clear phenomena. First, we would expect to see momentum
rewarded as securities that rose in price would capture an
increasing fraction of each incremental investment dollar.
Second, we would expect to see a rise in correlation as
securities become increasingly traded as a group.
Yes, this was posted by
another person here, but may have got missed.
I have reread this great article 3 times. Indeed, I can
clearly see this - Passive Investing and ETF are so dominant, that
individual stock CANNOT MOVE INDEPENDENT OF "The Market". I
think this applies both Technically (for this group) and
Fundamentally (for investors). I see this more and more
every year...no matter what the technical setup is on an individual
stock, the Passive Investing and EFT Market movements dominate.
It does not seem to matter (as much) any more if a stock is a
complete dog (losing money, no cash flow, declining sales, high
debt,....) it will go up with the market. It does not seem to
matter (as much lately) if a stock has a perfect bull flag, inverse
head and shoulders, support level,.....the "market movement" will
dominate. Very frustrating.
Policy in a World of Pandemics, Social Media and Passive
Investing
he behavior we are seeing
in public markets is not a signal of collective decision making,
“the wisdom of crowds” or the Efficient Market Hypothesis at work.
Instead, it’s an indication of a market that has been twisted
into a shadow of its former self by two forces – passive investing
and synthetic attempts to generate yield by systematically selling
volatility. This should not be a surprise. Using the
words of John Bogle himself:
“If everybody indexed,
the only word you could use is chaos, catastrophe…The markets would
fail.”
– John Bogle, May 2017
Over the past 25 years,
we have experienced unprecedented growth in passive investing.
Most Americans and market participants are unaware that this
has become the primary mechanism by which investments occur.
Regulatory changes, heavily influenced by the lobbying
activities of Vanguard and Blackrock, have led to an inexorable
flow of capital towards passive investing. Today, more than 100% of
gross flows into the stock market are passive (meaning
discretionary managers are facing gross redemptions) and nearly 85
cents of every incremental retirement dollar now flow into a target
date fund. Roughly half of all 401Ks hold a target date fund as
their sole security.
The theory behind passive
investing relies on a very simple concept, the Efficient Market
Hypothesis, which posits that current prices reflect all available
information. As a result, trying to “beat the market” is a
fool’s errand and investors should simply try to passively
participate. Unfortunately, the assumptions behind passive
investing are critical -- no transactions costs, costless
information, homogenous expectations, and perfectly rational
investors. These do not hold in the real world.
The arguments for passive
index investing over active investing received a further shot in
the arm from a simple thought exercise by William Sharpe in 1991,
“The Arithmetic of Active Management”. Again, Sharpe’s work
is seductive in its simplicity:
If "active" and "passive"
management styles are defined in sensible ways, it must be the case
that
(1) before costs, the
return on the average actively managed dollar will equal the return
on the average passively managed dollar and
(2) after costs, the
return on the average actively managed dollar will be less than the
return on the average passively managed dollar
This observation set the
stage for a revolution in investing with fees for managing assets
collapsing over the last three decades. These declines have
taken the form of reduced annual fees, reduced sales load fees and
reduced commissions. This appears to be the ultimate free
lunch for investors; but what if the assumptions are wrong?
Looking closely at Sharpe’s work, it is clear where an error
lies:
A passive investor always
holds every security from the market, with each represented in the
same manner as in the market. – Sharpe, 1991
There is a key assumption
within the articulation that the investor holds the market
portfolio. How does the investor get in? Apparently magic.
How does the investor get out? This would also be magic.
These assumptions were successfully challenged in a 2016
paper by Lasse Pedersen, “Sharpening the Arithmetic of Active
Management” where the author noted that changing index construction
requires passive participants to trade. Pedersen’s work, however,
did not go far enough. As the above flows charts highlights,
“passive” investors are forced to trade every single day due to
incoming flows. Each new dollar invested into passive index
funds must purchase the securities in the benchmark index.
These purchases exert an inexorable influence on the
underlying securities. Per Sharpe’s own work, these are not
passive investors – they are mindless systematic active investors
with zero interest in the fundamentals of the securities they
purchase.
If incremental investor dollars were increasingly flowing
into market capitalization indices, we would expect to see two
clear phenomena. First, we would expect to see momentum
rewarded as securities that rose in price would capture an
increasing fraction of each incremental investment dollar.
Second, we would expect to see a rise in correlation as
securities become increasingly traded as a group.
Strategy in Last 30min of Trading - Steve and Matt has sometimes
said "do not try to trade the last 15min". True? Why?
What are some of the other "rules" and "advice" on the last
30 minutes? Lately, my plans and strategies go fine
during the day, but wow! lately, at 30 min to close, things start
whipsawing all over the place. At 30 min, I think, Ok, I know
how this is working as I see it take off, only to realize, NO, that
is the 30-15min head fake, not the real last run of the day in the
OTHER direction. [yes, aside from triggered entries and
tight stops] thanks!
The community is delayed by three days for non registered users.
SH_or_SPYshort_which is better for 3-6
Posted by Walt on 4th of May 2020 at 10:29 am
SH_or_SPYshort_which is better for 3-6 months?
Aside from trading, I am considering now placing a hedge against my long term long holdings. Would you do SH (S&P short) or SPY Short?
SH pays a quarterly dividend of 1.39%, but does it decay deteriorate (nightly or weekly) due to lost time value of futures and options underneath? KEY QUESTION HERE.
SPY short would mean I would have to payout the 2.06% dividend quarterly. Hence, I am leaning SH. Thoughts? Decay deteriorates?
SH Question #2 - do they just short SPY for you? or is it comprised of complex derivatives, futures, and options? How do they pay you 1.39%?
Jim Cramer-not guru, but..... “We’re now
Posted by Walt on 1st of May 2020 at 06:19 pm
Jim Cramer-not guru, but.....
“We’re now at plus 7.2% on the S&P short-range oscillator. That’s the one I swear by,” CNBC’s Jim Cramer said. “Anything above plus 5 is overbought. A 7.2 reading makes me concerned,” the “Mad Money” host said. This is the one that "called the bottom" when it "fell to the minus 20s in March,” he explained. “We’re now at plus 7.2% on the S&P short-range oscillator. That’s the one I swear by. “Anything above plus 5 is overbought. A 7.2 reading makes me concerned.”Boy-TheShippingTankersSureLostThierPopularityQuickly Crash and burn today
Posted by Walt on 29th of Apr 2020 at 07:40 pm
Boy-TheShippingTankersSureLostThierPopularityQuickly
Crash and burn today
MarketChameleonHasTheBestEarningsCalendar ...check it out. Because it
Here's a list of companies reporting tonight after the close
Posted by Walt on 29th of Apr 2020 at 12:06 pm
MarketChameleonHasTheBestEarningsCalendar ...check it out.
Because it has BMO, AMC, shows results last time, and results this time.....
https://marketchameleon.com/Calendar/Earnings https://marketchameleon.com/Calendar/Earnings
I get stopped out 2/3
APT Updated View
Posted by Walt on 24th of Apr 2020 at 10:02 am
I get stopped out 2/3 times on these like: APT and GBTC. I think I have a pretty generous wide stop larger than 150% of the biggest pair of candles, but obviously, not wide enough??? What am I doing wrong. Is there a rough formula to compute wide stop, or just go naked until it gets steam upward?
Yes USO no good.
Maintain caution trading $WTIC via the USO Chart of $WTIC vs ...
Posted by Walt on 23rd of Apr 2020 at 02:50 pm
Yes USO no good. What is the best Symbol for Real Spot Price of Oil that shows in StockCharts, ThinkOrSwim,...??
First example of "restart" not
SPX 30 Updated View
Posted by Walt on 22nd of Apr 2020 at 05:51 pm
First example of "restart" not that easy - Hard Rock Hotel Chain reopened major nice hotel 3-4 weeks ago, and only 12% occupancy
“We reopened the Shenzhen Hotel, obviously [in] a global city in China. Beautiful property. Occupancy is right now at 12%. We’ve been reopen for a good 3½, almost four weeks,” he said, citing the Shenzhen property as an example of the tough road ahead that other parts of the world may face in restarting their businesses.
Allen said that tourism, which has been decimated by the Covid-19 pandemic, supports the Hard Rock Hotel Shenzhen as well as other international properties. “If you look at the Hard Rock Cafe in Times Square [in New York City] it is tourism, a restaurant that does $50 million in actual sales, that’s all tourism. ... London is tourism. ”
Hard Rock expects its casinos, hotels, restaurants to take a year to recover after they reopen
Wow, that last 5 min
Posted by Walt on 22nd of Apr 2020 at 03:59 pm
Wow, that last 5 min the Indexes lost whole hour of gains!!
Best Way to Play Gold
Posted by Walt on 21st of Apr 2020 at 03:29 pm
Best Way to Play Gold Up? Too many options to pick from. What is the best way to play just price of gold WITHOUT influence from ETFs and Mutual Funds....? (and not futures contracts, commodities, or options)
NOT A COMPANY, MINER, or stock influenced by ETFs, IWM, SPY, Mutual Funds,.....
OIL Drop Causing other Damage I
all the tankers followed through
Posted by Walt on 21st of Apr 2020 at 01:35 pm
OIL Drop Causing other Damage
I like the tanker play Matt!
Op-ed: Recovering from this unprecedented oil crash could take years and may not benefit Saudi or Russian producers
Some other issues are emerging this morning as the collateral damage being done is in the early stages of being tallied.
Yesterday, the Financial Times reported that a Singaporean trader hid some $800 million in losses from oil trades gone sour. His counterparties include HSBC, Société Générale and ABN Amro.
On Tuesday, there are reports that South Korean investors have recently loaded up in structured notes tied to the price of crude and are likely suffering large losses as the result of yesterday’s historic crash.
Add to that, the likelihood of additional, and large, losses among hedge funds, domestic holders of leveraged oil exchange-traded funds, highly levered oil producers and a coming wave of bankruptcies among those same companies and the damage done to oil markets is far from over.
ETF marketers are already suggesting they may, or will, halt trading in them or possibly liquidate them, causing a further cascade in the price of oil.
In history, there are parallels but no precedents.
In 1986, then Saudi Oil Minister, Sheikh Ahmed Zaki Yamani, decided to punish OPEC members who were not abiding by the cartel’s daily production quotas and taking market share from the Kingdom.
To enforce discipline, the Saudis flooded world markets with crude, driving the spot price of oil to just below $10 per barrel.
The damage to oil producing nations, including the U.S., was severe. Cities like Houston, Dallas, Oklahoma City and elsewhere closed up shop, with large and small oil companies capping wells and going bankrupt and/or merging.
The pain lasted for years.
Why can't they hold onto
all the tankers followed through
Posted by Walt on 21st of Apr 2020 at 01:05 pm
Why can't they hold onto it?
Marie Kondo can make 37 pairs of shoes disappear, but she can't stuff millions of oil barrels into a wicker basket. There's just no place to store the stuff.
Some traders are sending barrels on a leisurely cruise aboard very large crude carriers (literally, VLCCs). "Many traders are betting that the coronavirus pandemic will run its course and demand for oil will jump later this year," the WSJ explains.
Well, funny, I was playing
Posted by Walt on 16th of Apr 2020 at 08:00 pm
Well, funny, I was playing a small range of SPY at 5:30 CST and saw a HUGE spike in volume (10-20-30 times), one bar passed, no real change, another bar passed, no big change, I am thinking "something big is happening I do not know about..hum..danger?", I was long two good size positions, they then hit my two higher targets, I am out, happy, and one more bar, and BOOM skyrockets. Oh well. Made $163 instead of $1,630.
BUYERS - Who the heck
Posted by Walt on 15th of Apr 2020 at 02:36 pm
BUYERS - Who the heck are the Buyers? I know this is a fundamental question, in a technical forum, but... who the heck are all the buyers when the news and outlook is horrific. I just do not understand. Any insights from anybody?
Yes, me too, Think or
anyone else have think or swim crash?
Posted by Walt on 13th of Apr 2020 at 01:16 pm
Yes, me too, Think or Swim will not load
Possible Explanation for Rally (again
Posted by Walt on 10th of Apr 2020 at 03:38 pm
Possible Explanation for Rally (again the markets are 60+% moved by balancing of Passive ETFs and Funds)
From Analysts:
"The Great Equity vs Debt Rebalancing After QE4ever.
Many institutional money managers and funds were unable to capitalize on what they saw as a buying opportunity after the GVC depressed the S&P 500 following its February 19 record high. In particular, balanced funds couldn’t take advantage of the great opportunity they saw to rebalance away from bonds and into stocks because the bond markets had frozen up, making it impossible to raise cash by selling bonds.
That all changed on March 23. We noted that institutional investors rushed to sell their bonds to the Fed and used the cash to rebalance into equities. We think investors still have plenty of bonds to sell to the Fed, which will bring in cash with which to buy stocks. That would support our belief that the bear-market bottom was made on March 23. "
I personally do not believe we are out of the woods, and expect a steep drop soon, but not putting any more capital to that!
Indiv Stocks Move 60% With
Posted by Walt on 7th of Apr 2020 at 08:13 pm
Indiv Stocks Move 60% With Market
I ndividual Stocks Now Move 60% With The Market These days, NOT ON THEIR OWN MERITS!!
(i.e. you cannot trade on the merits, fundamental or technical, of a particular stock, unless you were to hedge out 60% for all the ETFs that hold that stock.)
(this is due to Passive Investing, Algos, and ETFs)
I have reread this great article 3 times. Indeed, I can clearly see this - Passive Investing and ETF are so dominant, that individual stock CANNOT MOVE INDEPENDENT OF "The Market". I think this applies both Technically (for this group) and Fundamentally (for investors). I see this more and more every year...no matter what the technical setup is on an individual stock, the Passive Investing and EFT Market movements dominate. It does not seem to matter (as much) any more if a stock is a complete dog (losing money, no cash flow, declining sales, high debt,....) it will go up with the market. It does not seem to matter (as much lately) if a stock has a perfect bull flag, inverse head and shoulders, support level,.....the "market movement" will dominate. Very frustrating.
Logica Funds Blog Research
PDF Version
Here is some excerpts from:
Policy in a World of Pandemics, Social Media and Passive Investing
The behavior we are seeing in public markets is not a signal of collective decision making, “the wisdom of crowds” or the Efficient Market Hypothesis at work. Instead, it’s an indication of a market that has been twisted into a shadow of its former self by two forces – passive investing and synthetic attempts to generate yield by systematically selling volatility. This should not be a surprise. Using the words of John Bogle himself:
“If everybody indexed, the only word you could use is chaos, catastrophe…The markets would fail.”
– John Bogle, May 2017
Over the past 25 years, we have experienced unprecedented growth in passive investing. Most Americans and market participants are unaware that this has become the primary mechanism by which investments occur. Regulatory changes, heavily influenced by the lobbying activities of Vanguard and Blackrock, have led to an inexorable flow of capital towards passive investing. Today, more than 100% of gross flows into the stock market are passive (meaning discretionary managers are facing gross redemptions) and nearly 85 cents of every incremental retirement dollar now flow into a target date fund. Roughly half of all 401Ks hold a target date fund as their sole security.
The theory behind passive investing relies on a very simple concept, the Efficient Market Hypothesis, which posits that current prices reflect all available information. As a result, trying to “beat the market” is a fool’s errand and investors should simply try to passively participate. Unfortunately, the assumptions behind passive
investing are critical -- no transactions costs, costless information, homogenous expectations, and perfectly rational investors. These do not hold in the real world.
The arguments for passive index investing over active investing received a further shot in the arm from a simple thought exercise by William Sharpe in 1991, “The Arithmetic of Active Management”. Again, Sharpe’s work is seductive in its simplicity:
If "active" and "passive" management styles are defined in sensible ways, it must be the case that
(1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and
(2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar
This observation set the stage for a revolution in investing with fees for managing assets collapsing over the last three decades. These declines have taken the form of reduced annual fees, reduced sales load fees and reduced commissions. This appears to be the ultimate free lunch for investors; but what if the assumptions are wrong? Looking closely at Sharpe’s work, it is clear where an error lies:
A passive investor always holds every security from the market, with each represented in the same manner as in the market. – Sharpe, 1991
There is a key assumption within the articulation that the investor holds the market portfolio. How does the investor get in? Apparently magic. How does the investor get out? This would also be magic. These assumptions were successfully challenged in a 2016 paper by Lasse Pedersen, “Sharpening the Arithmetic of Active Management” where the author noted that changing index construction requires passive participants to trade. Pedersen’s work, however, did not go far enough. As the above flows charts highlights, “passive” investors are forced to trade every single day due to incoming flows. Each new dollar invested into passive index funds must purchase the securities in the benchmark index. These purchases exert an inexorable influence on the underlying securities. Per Sharpe’s own work, these are not passive investors – they are mindless systematic active investors with zero interest in the fundamentals of the securities they purchase.
If incremental investor dollars were increasingly flowing into market capitalization indices, we would expect to see two clear phenomena. First, we would expect to see momentum rewarded as securities that rose in price would capture an increasing fraction of each incremental investment dollar. Second, we would expect to see a rise in correlation as securities become increasingly traded as a group.
Yes, this was posted by another person here, but may have got missed.
Comments
Fantastic new essay on the financial markets and the covid ...
Posted by Walt on 7th of Apr 2020 at 12:34 pm
Individual Stocks Move With The Market
I have reread this great article 3 times. Indeed, I can clearly see this - Passive Investing and ETF are so dominant, that individual stock CANNOT MOVE INDEPENDENT OF "The Market". I think this applies both Technically (for this group) and Fundamentally (for investors). I see this more and more every year...no matter what the technical setup is on an individual stock, the Passive Investing and EFT Market movements dominate. It does not seem to matter (as much) any more if a stock is a complete dog (losing money, no cash flow, declining sales, high debt,....) it will go up with the market. It does not seem to matter (as much lately) if a stock has a perfect bull flag, inverse head and shoulders, support level,.....the "market movement" will dominate. Very frustrating.
Logica Funds Blog Research
PDF Version
Policy in a World of Pandemics, Social Media and Passive Investing
he behavior we are seeing in public markets is not a signal of collective decision making, “the wisdom of crowds” or the Efficient Market Hypothesis at work. Instead, it’s an indication of a market that has been twisted into a shadow of its former self by two forces – passive investing and synthetic attempts to generate yield by systematically selling volatility. This should not be a surprise. Using the words of John Bogle himself:
“If everybody indexed, the only word you could use is chaos, catastrophe…The markets would fail.”
– John Bogle, May 2017
Over the past 25 years, we have experienced unprecedented growth in passive investing. Most Americans and market participants are unaware that this has become the primary mechanism by which investments occur. Regulatory changes, heavily influenced by the lobbying activities of Vanguard and Blackrock, have led to an inexorable flow of capital towards passive investing. Today, more than 100% of gross flows into the stock market are passive (meaning discretionary managers are facing gross redemptions) and nearly 85 cents of every incremental retirement dollar now flow into a target date fund. Roughly half of all 401Ks hold a target date fund as their sole security.
The theory behind passive investing relies on a very simple concept, the Efficient Market Hypothesis, which posits that current prices reflect all available information. As a result, trying to “beat the market” is a fool’s errand and investors should simply try to passively participate. Unfortunately, the assumptions behind passive
investing are critical -- no transactions costs, costless information, homogenous expectations, and perfectly rational investors. These do not hold in the real world.
The arguments for passive index investing over active investing received a further shot in the arm from a simple thought exercise by William Sharpe in 1991, “The Arithmetic of Active Management”. Again, Sharpe’s work is seductive in its simplicity:
If "active" and "passive" management styles are defined in sensible ways, it must be the case that
(1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and
(2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar
This observation set the stage for a revolution in investing with fees for managing assets collapsing over the last three decades. These declines have taken the form of reduced annual fees, reduced sales load fees and reduced commissions. This appears to be the ultimate free lunch for investors; but what if the assumptions are wrong? Looking closely at Sharpe’s work, it is clear where an error lies:
A passive investor always holds every security from the market, with each represented in the same manner as in the market. – Sharpe, 1991
There is a key assumption within the articulation that the investor holds the market portfolio. How does the investor get in? Apparently magic. How does the investor get out? This would also be magic. These assumptions were successfully challenged in a 2016 paper by Lasse Pedersen, “Sharpening the Arithmetic of Active Management” where the author noted that changing index construction requires passive participants to trade. Pedersen’s work, however, did not go far enough. As the above flows charts highlights, “passive” investors are forced to trade every single day due to incoming flows. Each new dollar invested into passive index funds must purchase the securities in the benchmark index. These purchases exert an inexorable influence on the underlying securities. Per Sharpe’s own work, these are not passive investors – they are mindless systematic active investors with zero interest in the fundamentals of the securities they purchase.
If incremental investor dollars were increasingly flowing into market capitalization indices, we would expect to see two clear phenomena. First, we would expect to see momentum rewarded as securities that rose in price would capture an increasing fraction of each incremental investment dollar. Second, we would expect to see a rise in correlation as securities become increasingly traded as a group.
Hi SSaffer, Can you post
SPY Monthly. My longer term target ( With the ...
Posted by Walt on 3rd of Apr 2020 at 03:18 pm
Hi SSaffer, Can you post the same chart for today? This one posted appears to be a month old. (it is fantastic!) Thanks
Strategy in Last 30min of
Posted by Walt on 1st of Apr 2020 at 06:08 pm
Strategy in Last 30min of Trading - Steve and Matt has sometimes said "do not try to trade the last 15min". True? Why? What are some of the other "rules" and "advice" on the last 30 minutes? Lately, my plans and strategies go fine during the day, but wow! lately, at 30 min to close, things start whipsawing all over the place. At 30 min, I think, Ok, I know how this is working as I see it take off, only to realize, NO, that is the 30-15min head fake, not the real last run of the day in the OTHER direction. [yes, aside from triggered entries and tight stops] thanks!
Yes, fantastic article on how
Fantastic new essay on the financial markets and the covid ...
Posted by Walt on 1st of Apr 2020 at 10:43 am
Yes, fantastic article on how "passive" ETFs really ARE the market.
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