The agenda, precisely put is understanding what does trend mean and how to understand more about it. Efficient Market Hypothesis claims the daily price returns are fully normally distributed. That is the price follows a log-normal distribution.

Hence, the standard deviation of a sample of size N, will have

Now, interestingly, trending nature(which can be simulated by an Ornstein-Uhlenbeck Process) is when, the return on one direction is more than the return on other. That is, if a price asset is trending, it will have more instances of positive(or negative) returns than negative(positive) returns which generates a kind of “fat tail” distribution. A distribution which is not balanced around the mean.

So, in such situations, if we are able to find a price series with its variance more than a standard gaussian variance for a sample size of say , then we can confirm that indeed we do have a trending asset.

Now, consider, if we have a price series, which is lognormally distributed. Its 1-sample variance (achieved by a simple 1 period difference in closing prices divided by the previous closing price-> squaring it up-> summing it up-> dividing by Numbers of Bars-1 {its an estimator} ) is say then, ideally its 4 bar standard deviation will have which equals .

If an asset which shows an period standard deviation more than times the 1 period deviation, we have a trending asset.

Any failure to do so, will give a fair idea as it being a “counter-trend” trading price series.

Going ahead,I have coded up a MATLAB code to do the same [you can get the code if you ask me for it].

Using this, let me analyse 800 period returns for three assets. US based S&P 500 based ETF (SPYDR),India based  S&P CNX NIFTY and NSE traded price series of Larsen and Toubro. If the reader wants me to analyse any further price series,do leave me a comment.

Each data set will be presented in the following way.

Expected Ratio* Observed Ratio**

A lot of people filter out their universe based on market caps, some on volumes and further still on average traded value. All of them can be fine. Some performing better than the others. But one deep problem remains, all of them throw out otherwise perfectly tradeable assets/price series. In other words false negatives.

Before adding liquidity filters, we must really have a perspective into what do we want.Or rather what are we looking for.

Are small caps a problem, because they dont have enough market cap? Or is the price series essential “jumpiness” an issue? For me, it has something to do with the quality of price discovery .Ideally, if a stock’s price is 10paise, I am perfectly okay as long as it behaves like or nearly like liquid blue chip stocks, like LT or NIFTY. No huge jumps, no one sided dominated days, i.e it puts shadows on both sides etc etc. Very often, we involve ourselves with filters, which throw away a lot of otherwise perfectly tradeable assets. We do want to trade a small cap, which is liquid enough so that it doesnt whipsaw unnecessarily throwing our systems performance haywire

Define Illiquidity

What about this?

I reckon, having a measure of the “jumpiness” can help. How much does an asset gap up or down on average, or how frequent. An indicator with that kind of metric can help. Add with it,how often does it put shadows (that is Low!=Open High!=Close or vice versa).In my opinion, if you can find a linear combination of these two, then you will almost be very close to that level, which just sets the bar for a tradeable asset

Volume Functions

In my backtestings, involving volumes or any function there of into making decisions can improve the performance of the system. Whether, in a counter-trend system, shorting at some particular new high,only when your basic conditions are met,along withan additional condition of  no significant surge in volume being noticed. Or the opposite for a trend following system.

It makes sense to not only use the four basic market generated variables, OHLC but also V.

I could extend it a bit further and stick my neck out, and say use OI as well, but OI has argely disappointed me on a systematic basis.

Cautiousness and Optimism, Hope and Fear… a bit of doubt as well, but mostly hope

Oh did I say, that Tom Basso once released a report which said, investing in a hedge fund just after a lacklustre quarter returned much higher returns than if you do the opposite.

> Folks like us, should be focussed more on wealth generation than wealth consumption.

> Risk is an inherent part of the game, and life can only grow, when there is uncertainity.

> Professionals like us(he meant him and me) need a good solid break every quarter of so.

I especially seem to agree vociferously with him on this point. So I am in Bangalore now, since last week, and I am absolutely having a great time.

Spending my time, enjoying the cool climate, company of great friends, alcohol filled arguments, the illusion that my chess has improved(I have beaten “Chess Titans” 4times straight in Intermediate Level. )

In light of this, I couldnt update the July newsletter report. July for the sake of statistics ended flat.

I will be back at home by the end of this month, look out for August newsletter by then.

Till then,

Adios!

I dont know. But this legend drove scores of Bengali men for centuries to venture out in the darkest of nights, braving the perfect of the torrential storms for netting those famed molluscs. If you had ever an experience of seas,you can think of the vision I can imagine of. Seas are unruly creatures. During monsoons, the seas acquire a beastly quality of their own. And, ah! the beauty.

The sea swells just like the breathing bosom of the most beautiful woman sleeping, dreaming her own dreams. The darkness of the new moon night with only the rains to keep you for company, breaks many a men.Bay of Bengal has a nasty habit of giving birth to many a cyclone, many whirlpools during monsoons.But for centuries, those conchshells were a symbol of valour, courage and glory. And men, went out and went for fishing those molluscs.

Women ,when their men used to return bringing with them those milky white shells, used to flaunt the bangles cut out of those shells as a mark of their men’s love for them.

Courage,Pain and Fear- are the trio which can drive a man to feel proud of himself. Pain, we are hardwired to feel that, fear is the precursor of agony, but courage is the grandest emotion of all. It spurs us to surpass our limitations and go beyond them.

I am sure, you had a very interesting life. Full of ups and downs and a life well lived. But there will be times, when you will feel particularly proud of yourself. And no, buying material things like a new Rolex, or a LearJet cant take the place of that pride. You might feel satisfied, but not proud. Pride comes when we realize that we came face to face with our limits and went beyond them.

In the past month, I found myself losing focus. Losing the precisionary focus to achieve things grander than yourself. And I realized, I have stopped chasing my limits,chasing my fears. Instead, I have let my fears do the talking.

And the realization of it, has hit me like a diamond bullet straight in my forehead. I am going to build this up again, inch by inch, yard by fuckin yard.

As I do this, I intend to build an ecosystem of the most confident, passionate,ambitious folks around me.

Are you up for it?

Leave a comment, if your views resonate with mine. Leave even if it doesnt

Back in Jan, in my numerous tweets and thoughts which popped up,on markets in this blog post, I have talked how sceptical I am of ever increasing claims of outperforming Indian markets. Folks went home with great predictions of 25%+ growth and Sensex at 21000 by June and Moon at 100INR. Okay the last bit was a joke.

But you get it. I was sceptical and brought this thing up time and again, that its possible, we might not see more than 5300 before the first half of the year.

Given that,I had been validated, it will be of course natural for folks to believe, I must have made full use of it. Partly, would be subject of your awe and reverence. Okay, thank you. I love it. But truth to be said, being right and making money is totally different thing. And there is no credit, in being right like this, when I couldnt really profit from such an insight.

For the past six months, 5300 had been a graveyard in the sky. Each time NIFTY attempts to go past it,it crashes under its own weight. In June atleast it,attempted to go beyond at least 4 times.  A classic and absolute flight of volatility.

Quite some time back, on May 28th, I posted a chart, here talking how the big picture is, we are trapped in an upward sloping channel. Not too bad, for those who read it, and went long after the decimation of May.

I myself, went long in my personal account and it was good. But the inability to make a higher high is getting me. 5300 is proving too good for NIFTY. And with this, each time NIFTY closes above 5330, its brought down to 5350ish. or so. Almost within the next trading session.

Take, it from me, it will take a major act of strength and resilience to cross and stay over 5300. Am I getting worried. No. Am I getting frustrated. Yes!

In my belief, we are in the end game of this. The charts show, a couple of inside bars preceded by the 30th June big fat candle. Typically this is a classic sign of missing volatility. I believe,we are on the last stages of such a test.

Its possible, that NIFTY drops 40-50 points more, to shake out weak hands. So that will make it close to 5190.  But, I am overall of the belief that its time,for the next leg of the rally.

1980′s was a different time. 80′s was the time of the eponymous Wall Street and the PC, of bull market and euphoria. Japan was the newest kid on the block, and slowly but surely the attention of US economy was unflinchingly bored on Japan’s economy. Toyota and Sony were the newest kids on American markets, having entered mostly in the later years of 70s.

There was a common conception, that Japan has taken “the baton” from US. Japanese cars were selling like hot cakes, and the general start of the rot in American carmakers which we are seeing today,started at around that time. But nobody felt threatened as, people today are feeling ,about India and China, because Americans knew “Jappos are one of us” .After all,”Japan is just another place our fellow Americans are there”. If anybody is benefiting, they thought its them. So no issues.[ Japan was and remains to be one of the most strategic and largest American Naval base outside America. Due to the extensive trade treaties,one of the largest trading partners of Japanese were Americans]

So the economic and psychological wisdom was Japanese are the people you should be looking towards. Though, no doubt and this huge rise in exports created a flourishing stock market. Decades of pumelled Japanese pride found its outlet through the bull market of 1980s. Forget the S&P, it was Nikkei stealing the show, in terms of investor mind share.

Traders used to stay awake the later parts of the night,follow the Japanese index through telex and telephone,find the closing and bet in correspondingly the next day on DJIA. It was easy. Spot the behaviour, bet the ranch. And yes, stay long!

Each bull market comes on the back of credit. Credit expansion as they say, and Japanese went all out on a credit expansion spree. Japanese are very sentimental about debt, mind you.We orientals, all are. But Japanese are more so. But debt is a debt when you borrow from others right? What is, a debt if you borrow from your own family members. So Japanese borrowed heavily internally. They piled on huge, extremely huge levels of debt and kept on loading it. Banks were the creditors. Japanese government was the sundry debtor.

But even the best of the parties has to come to an end. Its tiring after all,to dance to rock and roll all night,all day. By the way, it was late 80s, NIKKEI went parabolic. Dow went near-parabolic as well. And then suddenly fears of slowdown started appearing. The credit rise, brought other countries into a small patch of bull market themselves. Small pockets of prosperity across the world started popping up. Malaysia, Thailand,  Spain etc etc.

So, the other emerging economies, I believe immediately had a competition with Japan, (silent competition though) for the same investment capital.Reasons though, there are many and we can talk about them,till WordPress servers crash, but the end result was parabolic growth seldom sustains.

And yes,it was soon followed by a run on the bank. Japanese banks of course. Not only one “run” but a simultaneous one on almost all major ones. Suddenly credit dried up. Japanese banks started going belly up, and the government, aah! the government. The government in its naivety believed, any problem can be wished away by throwing enough amount of money on it. Well, throw they did, and it went away. The money that is. Not the problem!

NIKKEI tanked in 89, and this chart tells a lot of the story better than me. And yes, take a look at DJIA as well.

While NIKKEI, entered a loong loong double decade of L-shaped recovery(no recovery at all), Americans kept chugging along.Japan entered deflation, coupled with massive undervaluation of Yen, coupled with dizzing levels of internal debt etc etc.

NIKKEI

Slowly their mass behaviour of checking NIKKEI prices overnight and trading on basis of that subsided as well. 80s came to an end, and with the fall of the Japanese markets, US entered a period of a 3 year long mini bear market. 1990-1992. Wont really say, a bear market in traditional sense as in absolute decimation of value, but a period of time when folks lost all interest from the markets.

Its important to have such periods. Period. (pun unintended).

Would urge you now, to reread this post again,and replace “US”, each time you read the word “Japan”, and “India” each time you come across the word, “US”.