#65 S2N: Myth Busting

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Following on from yesterday’s post about torturing statistics, I encountered another shocker today. Let me say that I am feeling a little more emboldened after Professor Tom, a tenured professor in statistics, shared my sentiments about financial time series not being completely random.

Let me get back to today’s story. Firstly, let me say that all of us market strategists, commentators, and bloggers are looking for that post or tweet that brings us viral traffic and acclaim. I am no different. All the marketing specialists say that to get noticed, you should interact with more famous people in your niche. It is not that I am looking for a fight, but sometimes I just can’t keep quiet. If anyone see’s me, make a statement or share some research that you disagree with; by all means, take me to task. I have no desire to push out sensational research at the cost of truth. We are on this journey together to seek a signal from the noise.

It would cost me my entire savings to get that kind of action on a tweet . The issue is that you cannot annualise the returns like he is doing. It is obvious that the VIX is a contrarian indicator so it will naturally be too low when the market is making highs and too high when the market is making lows. To annualise those segments is a mistake.

The results he presents in his chart that he believes debunks a Wall Street myth are, in fact, the complete opposite. I have created 2 segments: the returns when the VIX is above 20 and when it is below 20. The difference is that in my research, I held the trade for the actual full year. Furthermore buying the SP500 when the VIX is above 20 and holding for a full year produces a superior Sharpe Ratio than buy and hold.

S2N Observations

One of my favourite economists and money managers is John Hussman. He put this sentiment indicator idea out today, which ties in nicely with my observations on the VIX above. We are currently witnessing very elevated sentiment, with the ratio hitting the 2 standard deviation upper Bollinger Band. Hussman has had an incredibly difficult time in the markets over the last few years as markets have continued to run hard. He still remains one of the best thinkers in the game as far as I am concerned.

You will recall that I spoke about GameStop last week, as it enjoyed another meme dose of euphoria. It is still up 100% for the month, but this chart looks a little less foreboding. There has been lots of volatility to trade in this stock that is for sure.

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