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The Chairman
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(address
is not clickable)12/15/2005
Briefly Speaking, by Victor Niederhoffer
- As the year end approaches, a large number of markets are near vivid
points:
- S&P at 1280 near 1300
- DJI at 10883 near 11000 gold at 503 near 500
- oil at $61 a barrel near $60
- eurodollar at 1 eurodollar = $1.21
- VIX at 10.5 near 10
- copper at $1.96 a pound, corn at $2.07 and oats at $2.03 a bushel -- all near $2.00
- soybeans at $6.03 a bushel near $6.00
- Nikkei at 15254 and Hang Seng Index at 15059 near 15000
- FTSE-100 index at 5508, near 5500.
As the Palindrome is reported to have said early in his career, "I've had such a good year this year, why not even make it better--- you pay the bill." I predict that these markets will all end at their round numbers at the end of the year (or at least inordinately close).
- I have never believed in charting or the predictability of seasonality.
However, it is instructive to consider the moves in December of the S&P 500.
Year SP Move Year SP Move Year SP Move 2004 38 1994 6 1984 4 2003 53 1993 5 1983 -1.5 2002 -56 1992 4 1982 2 2001 9 1991 37 1981 -4 2000 6 1990 8 1980 -5 1999 80 1989 8 1979 2 1998 66 1988 4 1978 1 1997 15 1987 17 1977 0.3 1996 -17 1986 -7 1976 5 1995 10 1985 9 1975 -1 Considering the average variability of months during the period, and the drift from a S&P level of 91 in 1975 to 1280 today, it has always seemed to me that December is an unusually balmy month. I tested the joint distributions of good and bad months for randomness with a reasonably robust simulation procedure in EdSpec from 1870 to 1996, and concluded, "January and August have been the most bullish months, and September and October have been the most bearish months." The hypothesis needs to be updated and refocused to modern times, but I would tentatively propose that December is an inordinately mild month with a non-random tendency for stock prices to close near highs of the year, and a general tendency for markets to close near round numbers.The artful simulator Mr. Tom Downing, who is sorely missed at his previous employer, will be busy when he arrives today.
- Speaking of operatives who work for me, Mr. Dude from California, who
specializes in Niederhofferian methods for individual stocks, made a presentation
yesterday and was not pleased with all the "completely consistent with
random" he heard from the undersigned. Afterwards he fired an email to me with
something like the following:
I was completely dissatisfied by your reaction to my results. This may be the only firm in the world where if you work from 6 am to 8 pm every day the way I do, including Sundays, you get told, 'That adds to the randomness of your results because it means you tested more hypotheses and thus are more prone to multiple comparison Type 1 errors.' I don't wish to talk to you for a few days, in this world and never in the next. Strong letter to follow.
Yes, if you develop 50 hypotheses during the course of your work, and you then exult over the best one that is less than 5 in 100 to have occurred by chance, you have a 0.92 chance of falsely rejecting the randomness hypothesis. I find the book Multiple Comparison Procedures by Hochberg and Tamhane helpful in this regard. They review and systematize a plethora of methods for adjusting for multiple comparisons starting with Fisher's very conservative procedure to consider that if you have five different means to consider and thus ten different comparisons to make, you adjust your probability of rejection down from the normal 5% to 1/10 of 5%. A much more interesting and informative procedure is outlined in Rayner's and Best's "A Contingency Table Approach to Non-Parametric Testing" which I have been reviewing in conjunction with my continuing study of clustering and recommend highly.
- Whenever the kids come home from school, I like to go for a walk with them in the woods, as Beethoven and Brahms did for inspiration. Invariably, I'll say something like, "The shape of that oak tree trunk or maple tree leaf is very much like what happens in the market," and they'll reply, "Do you always just relate whatever you're reading or seeing to the markets?" I do tend to find insights from nature or other academic disciplines such as economics, anthropology, psychology, physics, biology, ecology, electronics, geology, geography, astronomy, sociology, history, statistics ( most of all), and games, sports, music, warfare and fishing very helpful in formulating fruitful hypotheses. I only wish I knew more about these subjects, and if I lived to be 1,000 I would still not find time enough to improve my understanding of these in an effort to better surmount the challenges and opportunities elicited by markets.