Sunday, October 21, 2007

A Site Devoted to Finding a Trading Edge

I'd like to call attention to the excellent MarketSci.com site, which conducts research on historical market patterns.

Here is a page with links to their various research articles. Among the topics you'll find are moving average crossover patterns, VIX patterns, and sentiment patterns with put/call ratios. The article on predicting the VIX itself is particularly interesting.

MarketSci.com's most recent post develops an idea that I recently advanced: looking at the relationship between gold and technology as a sentiment measure. Technology, as a growth sector, benefits from risk-seeking sentiment in the market; gold, as a safe haven, benefits from risk aversion. That suggests that the relative performance of gold to technology might provide a nice window into the risk appetites of traders and investors.

What they found was that, when the 3-day exponential moving average of the gold:technology ratio was below the 3-day simple moving average, returns for gold were above average. Indeed, cumulative returns from such a strategy look compelling (although further refinement to reduce drawdowns would be needed).

The reason such a strategy works, they suggest, is that profits from risk-seeking assets tend to flow toward risk-averse ones. An alternative interpretation is that dips in the gold:technology ratio represent trader/investor overreactions that tend to correct over time. If that is the case, then we should expect short-term outperformance by any safe haven to have bullish implications prospectively.

My next post will examine just such a possibility.

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Finding Gain Where There's Been Pain
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