Sunday, February 10, 2013

Raging Bull

It seems that most of the strategies that are in the public sphere, are consciously or unconsciously trying to prevent the large 2007-2009 draw-down. From simple to complex Tactical Allocation Systems, to mean-reverting strategies, to volatility based strategies, pairs strategies, etc. They all avoid (in hindsight) the biggest market crash that most of us have experienced.

But what happens in a Bull market? Most of these strategies will under-perform.








I will make an assumption, here:
Whatever strategy exists, if it is 'well performing' and is 'known' it will be imitated by more and more and eventually the 'market' will change in such a way as to make the strategy not work anymore. The market (or rather, the participants) will 'adapt' to the strategy.

Sample Tactical Allocation strategy: Immune to the 2008 drop but less so to the 2011 drop and 2012 bull run.

And let's just say I was to join ranks with those 'market paranoids' and look at ways on how the market is out to "outsmart' me. How could the market do that. What strategy would it employ?
Well, it would do what it has recently done:

Go up. Just up.

Most strategies I deal with have some kind of neutral outlook. I am fine with the market going no-where. I also like downside protection strategies that stand to benefit on a large downturn, either by shorting, hedging or playing the rise in volatility. What about raging Bull market? Where's the 2004-2007 index-beating straight-up bull strategy?

So here's one.



So yes, this has been a great bull market strategy. But during 2009-2012, when the SP500 did exceptionally well (and 'emerging' equity did less so) this remained fairly flat.


 I will not tell how it trades since I am sure you can build a better one. I will tell you that it trades country indices (data)*. You can get started by thinking of momentum vs value strategies.  I will also tell you what the current positions are:


See the catch?
How do you trade the Ukraine Index? Or the Lebanese?
So maybe Institutional investors are not 'smarter'. Maybe they just have more access to data and instruments.

If you know how to trade these indexes, or you live in these countries, drop me a line and tell me what you think, either here or via e-mail.





So far I only found etfs for Greece: GREK and GRE.PA

*Data used from MSCI Indexes.

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