20# Signal 2 Noise

In today’s issue:

• The NVIDIA chart belongs in a textbook

• Bloomberg Headline: SP500 makes new high despite inflation coming in worse than expected

• China goes dark

S2N Updates

Yesterday was the soft launch of Signal 2 Noise (S2N). Luckily, I only invited a few people. Everyone says you really learn when you go “live”. Ain’t that the truth? I was so confident that the page to choose the trial package was clear. It turned out that 95% of people who signed up, joined the blog but not the newsletter. I was delaying sending today’s letter as I have amended the registration page and invited those people to join the trial.

I have a question.

My overriding philosophy for the newsletter is that people should receive the full newsletter in their inbox. Many services only show a paragraph or two and require the subscriber to click on a button that brings them to the site for the full letter. I want to avoid this; many of the services I subscribe to give the full letter in the email.

My question is: once you have read today’s letter, let me know if you think it will be too much for me to add more quantitative details. I provide 1 analysis and then some commentary. On the one hand, I want to make the newsletter newsworthy and worth the financial investment. On the other hand, I am constantly self-conscious while writing, that I may be going on a little. Send me your thoughts by replying.

Performance Review

I try not to say too much here, as I like to think the dashboard tables above are pretty self-explanatory. For some technical reason, the tables above were not included in yesterday’s email, I really hope they are in today’s letter. What you will notice is that there are sometimes shaded colours. This is to help us identify if the change is worth taking notice of; a 3% move in Bitcoin is not the same as a 3% move in EURUSD. To learn a bit more about the Z-Score, which I use for the signal, read this blog post.

Things that stood out to me were the new all-time high for the SP500 and the rally in the Hang Seng Index (Hong Kong), with weakness in Japan and Australia.

Economic News Today

New Signals

There will be more to say here when I revise the signal report. I am including it because I want to share what a typical newsletter format will look like. In the table below, I see noise, which I need to remove ASAP. The point here is to highlight a Signal across all the symbols I am monitoring, which is more than 100. It is impossible to know when a particular “screener” has been triggered, as there are just so many. For example, if there are 100 symbols and I am running 20 signal screeners on each symbol, that means you would need to check more than 2000 signals per day to see if any have become active.

It is impossible for a human. For a computer, it is a piece of cake. The idea is to see the signal in the table below and then go visit the screener section on the research portal to do a deeper dive to see if its worth taking action.

S2N Insights

The NVIDIA chart belongs in a textbook

You will notice that my preferred charts on the site are clean, without any indicators or fancy bells and whistles. Price action is something gorgeous to behold in its simplicity. Less is more.

I have been trading for a long time and watching charts for more than 20 years. This is not normal and will inevitably have a significant drawdown from these levels, or perhaps even higher, although the odds become increasingly less favourable for the rally to continue in this parabolic fashion.

Bloomberg Headline: SP500 makes new high despite inflation coming in worse than expected

Yesterday, the monthly CPI (inflation) numbers were released, and there couldn’t have been a more perfect case study for me to demonstrate what Signal 2 Noise is all about. Let us start with the basics.

All of my charts and tables are home-grown in Python by me. I am not using any third-party software services but rather taking full control of the data. Hopefully, my coding skills can match my vision and speed needs. I am mentioning this because I can see I need to add more space to the right margin and put data labels on the mean. Monthly inflation came in hotter than expected, at 0.44%.

Most people make the assumption that higher inflation will lead to delays in the Fed reducing interest rates, which is normally interpreted by the market as bad news. The opposite, in fact, occurred last night with a strong rally. Now let us get back to the headline, and let me explain why this is such a perfect case study.

We all know that the Fed has a 2% inflation target for core inflation. A lesser-known fact is that the 2% isn’t based on the Labour Department’s report released yesterday. Instead, the Fed’s goal is measured against a separate index called the personal-consumption expenditures price index (PCE), which is maintained by the Commerce Department, and their February report is to be released on the 29th of March.

When I read the headline this morning, the first thing I did was run an analysis on what the performance in the SP500 would look like if you only invested when core inflation was below 2% versus above 2%. Spoiler alert: the results are far more noisy than you would have thought. Perhaps I can share my findings with the Bloomberg journalist.

In the above analysis, investing in the SP500 when core inflation is below 2% results in a cumulative return of 783%.

In the above analysis, investing in the SP500 when core inflation is above 2% results in a cumulative return of 1224%.

This is exactly what I am trying to do in the newsletter. I want to separate the logical noise from the signal with data-driven research.

China goes dark

I have been giving China a hard time over the last few weeks. I cannot overestimate what I believe to be a major threat to the global economic engine.

China is a communist-run economy, so they will do whatever they believe suits them, and they will hide from the public what they don’t want to be seen. This chart is a classic example of how they shared so much when times were good, but its pretty clear that things are not so good now, so they are sharing less.

We saw the world’s largest real estate developer, China’s Evergrande, go bankrupt last year. Yesterday, state-backed developer Vanke was trying to avoid a default with a debt restructure. A few minutes ago, I saw that Country and Garden, one of the largest Chinese developers, had just missed one of its bond payments.

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