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The Chairman
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11/13/2005
Changing Relations, by Victor Niederhoffer
Sometimes in a tournament you can be playing very correctly but you just don't get the opportunities. This is often just the luck of the draw but it might be a technical issue. For example if your game is too well known to your opponents they may be able to neutralize you. There are two ways of trying to solve the problem: either attempt to adapt (new systems and ideas) or wait for the tide to turn. Sometimes a bit of both. -- Grandmaster Nigel Davies
Regrettably, many of the relations between bonds and stocks, and between other variables, change over time. Thus, it is always good to see whether any relations that are posited over, say, a 15-year period, have worked over the last few years.
One must be very careful to consider whether the many slight variations of a particular hypothesis, combined with a small profit per trade, are not consistent with Father Random. This is where a knowledge of math or the ability to pick random numbers from a table or computer is very helpful.
Also helpful in this regard is humility, an acknowledgment of the utter unfathomability and orneriness and changeabilty of the market when confronted with fixed systems. The work on rational expectations in economics is a good theoretical caution in that regard.
A practical restraining link on the use of fixed bond/stock ratios comes during a period like last week when bonds set new low after new low, thereby according to the gestalt of the theory being highly bearish for future stocks, while stocks set new highs. Yet a retrospective review of the relation between bonds and stocks finds that they held the predictive clue, although this time it was the sharp up open on one day or another rather than the two-day, which countered the previous prediction of a decline based on a x-day maximum in stocks, if this or that open had been above the previous high.
I can hear a wise voice in the background telling me to take it easy before I use all this stuff, there are too many things on the plate.