[OT] For the Quant Investors among us, is this chart meaningful?

Great info

i don't think your chart is descriptive enough. what are you trying to show?

It’s kinda all in the title. RSI is a measure of overbought/oversold levels, 1s10s is spread between 10 yr and 1 yr treasure yield. Pretty self explanatory.

No, I'm not a quant and just about the only charts I pay attention to would be the Shiller PE for stocks, and during the housing crisis I was watching the Case-Shiller Price-Rent ratio. I did time the real estate market based on Case-Shiller and bought a foreclosed custom home in late 2009 for about half price. Shiller won a Nobel Prize for a reason. I think his simple books are terrific and written from the perspective of behavioral finance.

Anyway, I'm curious about your chart. I take it you have to have faith that the RSI has any predictive value at all.

So do I have this right?
(1) You broke 205 months into six-month intervals and plotted a "bar" for each interval that shows the RSI vs the treasury spread for that interval?
(2) High RSI is bearish and low RSI bullish?
(3) High RSI corresponds to low treasury spread and vise versa according to your regression line?
(3) I can't follow which bar corresponds to the 28th month and what the deviation from your correlation line is supposed to imply?

I think you get the idea. I used RSI of monthly S&P 500 chart (i.e. one candlestick per month) to determine if the market is at a peak in a bull market, or at the lows of a bear market. I.e. high RSI corresponds with e.g. 2000, 2007; low RSI corresponds with e.g. 2002, 2009. The idea is to predict that RSI based on the 1s10s spread from the past (in this case, 205 months ago). So, the chart shows how these two things correspond: the 1s10s spread, and the RSI of the market 205 months later. The chart shows that when the 1s10s spread was large (around 3.0%), the RSI of the monthly S&P 500 chart, 205 months later, was very low (i.e. at the bottom of a bear market).

The last time the 1s10s spread was near 3% was between the start of 2002 and the middle of 2004. So, if the correlation has any predictive capacity, then this chart predicts that we'll be at the bottom of a bear market some time between 2002 + 205months and mid-2004 + 205months (i.e. 2019 and mid 2021). This sorta jives with what I've been reading, most economic reports say the chances of a recession are high for 2020 and 2021.

But this is never talked about! People only talk about how the inverted yield curve (low or negative 1s10s spread) usually precedes a recession / bear market by 6-18 months or so. So I don't know if this is just a fluke, like a happenstance correlation that is meaningless and just happened to occur between 1980 and the present, or if there is actually some kind of cause and effect relationship, like an echo caused by interest rates from 205 months in the past.

Remember, anything you can figure out by analysis, is already known by the professionals who manage pension, insurance, and hedge funds, so it is already reflected in CURRENT PRICING, so it has no power to predict any market advantage.

SJG

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In my opinion, sjg, the first sentence you wrote is bullshit. Poopoo. Caca. Do all professionals automatically know all that can be known about economics and market finance by virtue of the fact that they are professionals? Do you know all that can be known in your field? Where is the evidence that you have that backs up your statement?

People have huge pots of money to manage. They are responsible for getting good results. They and their large firms have been doing this for a long time. Statistical analysis of the data is the most basic.

I was once going to try this on the stock market. Then I realized why it would not yield me anything. Its not just that the fund managers are professionals, its just the amount of money they are responsible for.

So when you look at data and do analysis, you are simply seeing why the current prices are what they are. You are not seeing anything which has any predictive power.

But sure, go ahead. I am sure that after listening to the weather forecast, you can find some bookmakers who will give you odds.

On athletic events and horse races they give you odds. In these speculation markets, they give you the current pricing. Eitherway, you are betting against the house, and you do not know anything they do not already know.

SJG

WARNING - The following accounts are considered to be forum trolls and may not be trustworthy:

san_jose_guy - commonly referred to as SJG this forum member is usually mocked or ignored, his comments should NOT be taken in any way as legitimate

^^^^^ Sock Puppet of a guy who earns his living by conning people into putting money into these speculation markets, rather than looking to their own abilities and to their own ventures.

SJG

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There are thousands of so called professionals mostly privy to the same information, although not always at the same time. It comes down to who's quickest, and the amount of subjective interpretation of the data. The example presented by FTS is one of thousands of analysis of longer term cycles of interest rates and the market.

But there are experts who's opinions are not available to the public. They handle the huge funds for the pension, insurance, and hedge funds. Their moves set the prices. This is long established. You cannot beat them. You can bet against them, just like you can bet on a roulette wheel.

SJG

^^^ Yes, their moves account for the bulk of the overall moves of the market. But do they employ any market timing strategies? Perhaps they have economic forecasts, and due to the fact that TODAY is not TOMORROW, the prices are set as they are today with the anticipation of the direction in which they are headed. I.e. how do you know they aren't also saying amongst themselves, "we see a high probability of a recession in 2019/2020, so there is no reason to sell everything TODAY."?

The Differences Between The Fund Managers and FTS

1. Their trades are of huge scale, so they determine the current prices, even if their number of moves might be small.

2. They don't need to look for correlations. They have been doing this with computers since the 1970's. All the have to do is make sure the computers continue to get current data, and as much data as possible, and the computers will find the correlations themselves, and will issue the orders.

3. So if something looks undervalued, right now, the order will be to buy, but not if it goes beyond a certain price. And it is primarily their own acts which drive the price. And then the opposite for selling.

4. They can also be feeding data about their own actions into the computers and the computers can then be continually issuing new trading orders, as this is going on.

5. They don't have to rationalize any of it, it is all numbers driven. Undoubtedly the machines are looking for the largest not fully exploited predictions.

So then for you to try and make predictions and act on them means that you are just betting against these professional fund management firms, the ones with PhD Statisticians, banks and banks of computers running around the clock, and decades of experience. And also, they know something which you do not, that is, what they are going to do next. And this latter is what drives the prices.

Lets see if we can find out more about this. I had looked into going into market speculation myself using computer statistics some decades back. Really I should be ashamed to admit that I had ever even thought about such a thing.

Here, talking about my latest R book:
https://www.tuscl.net/discussion.php5?id…

"
Then doing a principal components worksheet. There is an R matrix.

Excel does much with matices, like multiplication, determinants, and inverses. These last two are not simple to program. And Carlberg criticizes Bill for taking too many years to make it work well.

Then this gets into Eigenvalues and Eigenvectors.

Never professionally used anything like this, just not that involved in statistics, more involved in solving problems.

But I must confess, there was a time long ago when I thought that because of online stock market quotes, like say through Compuserve, that it would be possible to use methods like above to predict the stock market and gain real money profits.

Well, that was when I learned that the big boys are already mile ahead. And so what profits could be gotten out of such markets that way, they are already reaping.

The stock market is a rigged game if there ever was one.
"
https://en.wikipedia.org/wiki/Principal_…

Quantitative Finance
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"Generally, mathematical finance will derive and extend the mathematical or numerical models without necessarily establishing a link to financial theory, taking observed market prices as input. Mathematical consistency is required, not compatibility with economic theory."
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SJG

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FTS, anybody who has been around long enough knows it doesn’t take a genius to state that the economy and stock market will take a hit/drop or slowdown. The rate hikes is one bell weather maker necessary to slow down inflation and imbalances, but what people don’t know is how long or shallow the pending recession will be. Therefore proganstication attempts are futile, since most individuals are in it for the long haul, investing should be left alone without paying g much attention to these charts.

Knowing your time horizon is the best strategy of all time. Nothing beats it! If you have 10 years or more you should stay 100% invested in the equity markets, because those who pull out tend to enter back into equities
at a much higher point, when they “feel” safer.

The worst enemy in a long term investirnis emotion. Keep your head in the sand until your time horizon draws you nearer the need almost always outperforms a money manager who stares at charts and tries to predict short term trends.

Good luck!

@FTS I strongly suspect that this is some outlier-driven BS. What plausible mechanism would make a big treasury spread cause a market bottom, precisely 17y + 1m later? It's a kind of magical thinking to believe that this sort of analysis can produce actionable insights, and not just the kind of noise you get when there isn't that much data, and the tails are fat.

I’m with Meat on the direction of the markets, where you are depends on how long or short your time horizon is, lately it appears as if politics rather than policy is having some impact on short term results, this too shall pass.
It’s really nothing new.

Well here, they talk about this:
https://quant.stackexchange.com/question…

But the big players can do it on a larger scale, looking at more data, and then right away acting, and with enough money that the prices move. So really, you are just coming in after the fact, just engaging in glorified gambling.

What made the stock market go? Thomas Edison's ticker tape machine. It made it all have the emotional appeal of gambling.

And so the Internet, mostly it is just a fancier version of the same.

SJG

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@justaguy, thanks for replying to my question. It’s a high correlation, but perhaps it’s just coincidence.

^^^^^ ANd perhaps others are already milking the system in every way imaginable, eating up any benefit you might be able to get. It is a rigged game.

SJG

^^^ “Any sufficiently advanced [game] is indistinguishable from [a rigged system].”

And that's why financial speculation is just glorified gambling. People do it because they get an emotional charge out of it and because they want bragging rights.

SJG

Not endorsing financial speculations of any kind. Its all just a waste of your own talents and money. We all should be able to do better things.

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SJG

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People speculate because that is what is required in any business transaction. Please remove your head from your anus.

^ I agree that SJG has his head in the sand, but trust not speculation is required for business transactions, most transactions consist of an exchange, I give you something of value to you in exchange for you giving me something of value to me. That’s not speculation.

My comment used the following definition of “speculation:”

speculation

noun
the contemplation or consideration of some subject: to engage in speculation on humanity's ultimate destiny.
a single instance or process of consideration.
a conclusion or opinion reached by such contemplation: These speculations are impossible to verify.
conjectural consideration of a matter; conjecture or surmise: a report based on speculation rather than facts.

^I know very well the definition of speculation, buying stocks can be speculative, however there is a perceived value, and a promise to perform, conditions can change during the duration that will change the nature of the transaction, but buying stocks in and of itself is really not speculation unless that is your sole intent.

The chart that I showed might just end up holding true: 205 months before January 2019 the 1s10s spread was 2.9%. The RSI of the monthly S&P 500 is down to 43.5.

^^^^^^ And of course the professional fund managers, and more importantly their computer banks, know nothing about this. They control the prices, but you have information they don't.


Talking more here:
https://www.tuscl.net/app/discussion.php…

SJG

People gamble because they get an emotional charge out of it. But people put their time and energy into business ventures because they believe in what they are doing and because they want to apply their abilities.

SJG