☕️ ...

This feels like déjà vu.  Just a g̶̛̘̮͚͋-g̶̭̀-glitch in the matrix?

Following the market's swift decline in August 2011, it quickly bounced 20%.  In the 2015-2016 correction, the market rapidly recovered 13%.  In both cases, market breadth (as measure by the percent of stocks above their 50-day moving average) exploded from extremely oversold (<5%) to extremely overbought (>90%). 

And, in both cases, the market would roll over to re-test lows.

As of Friday's close, we sit 17% above December's lows.  At the lows, market breadth was <5%.  Today, breadth has again exploded above 90%. 

We will see if 2019 proves a pattern of its own.
 

Regardless of the outcome, investors tend to adopt either a deterministic or probabilistic view of results.  The former stance tends to believe that being incorrectly positioned implies an error in prior judgement.  The latter believes that you can be positioned "correctly" and still be wrong.
 

I would acknowledge a third view as well: sustainability (or, more morbidly, survivability).  Deterministic or probabilistic, it seems prudent to ensure we are never knocked out of the game, regardless of the outcome.  

To paraphrase Nassim Taleb, the frequency space is less meaningful than the payoff space.  Frequency calibration argues that a gambler who is 80% accurate at Russian Roulette is "better" than an options trader who purchases far out-of-the-money puts with only a 1% probability of payoff. 

This may be true if we lived our lives in a Monte-Carlo simulation.  But living only one path, Russian Roulette is a game that will ultimately lead to ruin.

In this week's commentary, we discuss why the failure for longer-term trend following strategies to meaningfully de-risk in Q4 2018 or re-risk in Q1 2019 is no glitch, but rather hard-coded into the DNA of the strategy itself.  As a style, trend may be more crisis beta than crisis alpha.

Perhaps most interestingly, the realization of crisis beta will not only be a function of the speed of the trend-following system, but also the frequency we measure our results over!

Sustainability, then, is a two-fold consideration.  The first is about the trade-off of risks we are looking to make ("risk can never be destroyed, only transformed').  The second is about ensuring we are educated as to the types of crisis a trend-following strategy may be well suited to handle, and the relevant measurement period to evaluate success or failure over.

Check it out online or grab the PDF.

In other news, we're looking to hire for a Junior Quantitative Analyst role in Los Angeles, CA.  If you're interested, or know someone who is, you can find the full job description here.


🔌Corey

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