Risk Model
January 9, 2008 12:58pm by Barry Ritholtz
This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client. References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers Please see disclosures here: https://ritholtzwealth.com/blog-disclosures/
What's been said:
Discussions found on the web:Posted Under
Previous Post
The Danger from Bear Stearns New CEONext Post
Suit Up! (except for Billionaires)
Great info, BR. Thank you.
What is the liquidity category?
Maybe time for a FusionIQ category on this blog?
Your sentiment indicator on the first set is Bullish??? How did that happen when every other indicator shows neutral to bearish
OR is this a new form of research brought to us by the NAR…..LOL
could’nt resist……
Ciao
MS
and yes it seems like I did’nt read the above however I want to know HOW it’s quantified….
Ciao
MS
if 2007 taught you anything, it’s “don’t trust black boxes”…any description for your model’s data?
and any way to stop half of the posts i try getting caught in the spam filter?
Here is my secret for sector predictions. I am revealing it because, as most stock tips, it will be ignored. Plus, it takes a lot of effort and time to learn and understand it. Thus, my secret will remain safe.
Think ‘Statistical Process Control’ and view sectors as a process. Use economic theory and psychology to explain normal and abnormal variation within the control range. Once you understand variation, you can begin to make predictions. You don’t need complicated technical analysis.
George Montgomery is fairly easy to understand. He has written numerous text books on the subject.
Statistical Quality Control Using Excel by Zimmerman and Icenogle is a simple to understand and excellent introduction to the concept.
I think the short term sentiment (as a contrarian indicator) may be bullish, but longer term RSI and MACD have a ways to go.
I think this is the best article of the day (it’s not mine):
http://investmentpostcards.wordpress.com/2008/01/09/us-stock-market-confirms-primary-downtrend/
Also, it’s hard to play short term contrarian trades when you realize that most of the market is only first accepting that things are AS BAD or WORSE than they wanted them to be. Go to B&N and jaw-drop at the bullish 2008 prediction articles.
IMO, the short term sentiment indicator needs to be weighted less than the others …
Model looks good.
Banks have more to go? Why?
Imagine bank assets in the equity market. Every previous time we plummetted it came right back up. So there was no need to write down the asset side.
Watch what I think will happen in the future!
Most our US banks are bankrupt.
In fact, I think S&P 1360, or close by, will be the bottom, and it will bang around there abouts for about a month before turning upward. (A couple of weeks ago I wrote 1380. That was an error in memory on my part. I have data in front of me now.)
Having said that, if Hong Kong, Korea, Brazil, or other market that has only dipped a little breaks out to the downside, there may be a little more damage to the S&P, but only a little.
Personally, the fact the minor markets have not dipped more is variation I have trouble explaining. Watching them hold still, mostly in dead ranges makes me think that something similar is coming for them. I will probably avoid them for a bit longer.
August lows anyone….
Ciao
MS
And if craziness takes over, causing the S&P to fall much below 1360, that will be a gift to anyone who has cash on hand.
keep buying up that SPY…..LOL over the ask
PPT working overtime at the August lows…
easy to see…
Ciao
MS
Just covered my shorts and sold my TIP… I think the party is over for the shorts for now..
Time to take a nice vacation and wait for a rally to sell….
Proprietary dreck Barry, without a track record. How has it done and audited by whom?
rate cut tonight…….
Ciao
MS
Retail numbers must be nasty, PPT working on some ‘cushion’ for tomorrow, we’ll see.
Suge
does anyone know or can offer up ANY reason (other than the spurious buying of the SPY at the lows) that could have caused this reversal??
Can’t find anything that has any inkling of relevancy…….
Suge- You may be correct…..I have no idea but something is coming soon…..
Let’s see Market takes out August lows amidst more deteriorating fundamental news on the back of a poor day previous……sounds like the perfect time to buy….everything in sight…LOL
These guys will deny it till the grave….
Ciao
MS
I don’t buy this rally, nasdaq was down 25 points this morning and ultra short tech as negative as if it was being ‘manipulated’ (PPT?). Two, even if retail numbers are not that bad, their forecast for the rest of the year will be weak. Let me give you guys an example here, Countrwyide employees, Wamu Employees, KB homes employees, etc., do you guys have any idea how much ‘paper wealth’ these people have lost? 80% of their paper wealth is gone. Do you think these people went on a shopping spree this Christmas? Oh I forgot to mention, real estate values dropping to more realistic levels. So what if the fed cuts 50 basis points? How long will that last? A month? You can’t expect the market to drop every day.
Suge
I hear ya Suge-
I’m just sick of the institutions and the ability they have to do this whenever they want. You could’nt have scripted today any better…I even did yesterday however I was off (by a long margin) of where it would end up…I said 12,600…..what a fool I was….
That this type of action can be done by a few is what is really wrong here..not the lying or the cheating (because you’ll never remove that) but the ability to bully the market up simply because you can needs to be taken away from these people. It’s sort of the reason we have all these problems now.
Rate Cut or Tax “stimulus”….somebody already knows (based on the volumes)
Ciao
MS
I hear you MS but that has all been part of the big game for a long time now. I think there have been rally attempts like this earlier in the week as well but those failed and only succeeded today because of the deeply oversold conditions. Since the market barely got back half of yesterday’s losses, I don’t see anything fundamental changing. I would also be pretty surprised if a rate cut were announced this week.
Short Man
Barry, I’d love to hear your theory on today’s 3:50 pm launch. That was beyond ridiculous.
if i am right, poole’s statement about inflation not out of control was a hint from FED that we will get the 50 pt rate cut.
if tomorrow it does not get confirmed i expect a sell off….but if there is more such news….expect another big rally…
buyers were almost broken….and they were not willing to buy any more (most have run out of cash buying on dips).
but today rally will inspire buyers to support the fall tomorrow.
time to wait and go short after 50 pt rate cut…
Retailers are already reporting weak sales, American Eagle, Hot Topic, etc. Let the ‘rally’, ‘bad news are priced in’ mentality run for a little while. It’s OK.
Suge
Bringing the West Coast back b i t c h !!
Something was ‘fishy’ this morning, ultra short techs were negative the whole day even when the Nasdaq was down 25 points, never seen that before. Let’s be realistic though, it doesn’t matter, results is what counts. You have to take what the market gives you whether there is manipulation or not, it’s all part of the game.
Suge
I think 2008 will be the year of the short . What happen when the consumer slows spending ? We no longer make anything in this country except debt which we export . So the FED knows to be careful cutting rates. Cut the rates save the Bank and fuck the consumer with price increases from China . So there is no answer …. Any answer will be the wrong answer . I’m fully short for 1 month now on MBI , Ambac , XL , KBH , and up %32 percent . So I might be somewhat bais . Good Luck to all
I think 2008 will be the year of the short . What happen when the consumer slows spending ? We no longer make anything in this country except debt which we export . So the FED knows to be careful cutting rates. Cut the rates save the Bank and fuck the consumer with price increases from China . So there is no answer …. Any answer will be the wrong answer . I’m fully short for 1 month now on MBI , Ambac , XL , KBH , and up %32 percent . So I might be somewhat bais . Good Luck to all
I’m looking at the % increases of companies accross all industries and comparing it to where they were trading 6 months ago, it’s ‘pathetic’. Even with a 10% jump today, most of the companies I’m looking at are down still 20% to 30%. In my opinion, just to break even, the Dow and Nasdaq will need to have 300 point rallies every day for a week and a half (just a guess, don’t quote me). Some retailers are up after hours eventhough they’re lowering their forecast for 2008. This will not last, it will not last. Major layoffs coming, Countrywide, Wamu, Citibank, you name it.
Speaking of risk models, Moody’s said today that the “ability to track risk has shrunk forever”. “It is extremely unlikely that in today’s markets we will ever know on a timely basis where every risk lies,”
Hello?
How can MBIA maintain it’s triple A rating if it has to slash dividends as it’s that cash strapped??????
Chris Noyes,
You should learn how to use puts. You would have easily doubled or tripled your money at this point. I hold puts on RT (nice AH!), TLB, WB, and BBBY. They have been unbelievable. Then, when we languish in some bottom (who knows when), I will switch to calls. Who says you can’t have it both ways? I don’t invest much at the inflection points, but once stocks start deteriorating according to weakening macro trends and fundamentals, I pounce hard.
cinefoz, can you talk more about setting up how one can set up a statistical control model for the market?
Thanks.
gee nice model Barry, looks surprisingly similar to another company’s proprietary model hmmmm….. copyright infringement perhaps?
Michael,
the 1480-1475 level. had about 6 different technical levels in it;
August lows,
march lows,
76.4 retracement: may 06 high and December high
76.4 retrace:October high May 06 high
50% retrace: October highs july 06 lows.
As we bounced off the November lows, of course we will bounce off the august/march lows.
The rally showed signs of short covering, and not buying on the bid/ask tick ratio..
I wouldn’t be suprised if we go back to the 1420-1425 resistance… and make a new run lower..
I also wouldn’t be surprised if we open flat to down and just sell off again.
Very oversold, we needed a shake out lots of the weak shorts, suck in some stupid longs. give some people a chance to reposition. This market hasnt’ been this week since 2001
Of course I could be wrong.
Everybody has a model. Using my long-term model for SP 500 I made a predcition in April 2007, that SP 500 would drop in the period October through December 2007 practically to its level one year ago, i.e. to the level observed in December 2006 plus 4%. Quantitatively, it should be in the range from 1440 to 1460, and was at 1468.
Yesterday morning, 09.01.2008, the index was below that I predicted for the end of January 2008 – 1504. I think that this is just a fluc and it will recover to the predicted level of 1500 by the end of this month.
A rally has been started and will continue its (volatile) way back to 1500. No heavy clouds at one year horizon and further into 2009.
http://www.futuresboard.com/?ab=board&forum=1&board=2&thread=3616
So, do not panic. As it stays now, the return for January 2008 (from 10.01 to 31.01) will be around 6%. It is likely, however, that the index will have local minima due to natural fluctuations in current uncertain situation (for investors).
DH said
cinefoz, can you talk more about setting up how one can set up a statistical control model for the market?
reply: Find a sector and get a long term graph of it. Does it look like a process in control? Does the control range remain constant or shift? And why does it shift or remain constant? Using economics and psychology, explain the variation. I don’t calculate ranges or standard deviations. A good graph over a long enough period of time should make those clear.
To some extent, this is just the next level of napkin charting. You are just holding yourself to a system and forcing yourself to understand the process. Just as an engineer would attempt to explain outliers regarding a measurement on a machine, you should understand why things happen as they do in economic and psychological terms. That’s the real work.
Retail sales weaker than expected and during the Christmas season. Imagine what the rest of the year is going to be like. As far as a rally goes, sure, we can rally. Why not? Will it last? Not at all, wait until WAMU, CFC, etc., start laying off employees in the thousands, then you’ll see retail sales drop faster than a rock, same goes for credit card companies.
Suge
One more thing, don’t be surprised if ‘Ben Dover’ Bernanke tells the market to “GF” Itself.
Suge
I can’t believe anyone would buy into Bernanke’s speech or the rally that just took place. How is rate cut going to help retailers or consumer spending for that matter? I know so many folks at Countrywide who have lost 95% plus value of their portfolios/retirement plans. What good does a rate cut(s) for them?
Suge
This has to be the weakest ‘rally’ I’ve seen in a while. Couple of bad news and back to 12,500 (or under) in no time. Since I’m the only one posting here, I’m assuming everyone else is busy buying or shorting, right? I didn’t buy or sell anything today by the way, I’m comfortable with what my positions.
Suge