May

2

This reminds me of the Sherlock Holmes short story called "The Silver Blaze" in which the mystery was the dog that did not bark.

Why would a practitioner have success with one stock (AAPL) and failure with another (FB)? How are they different (or is there something else) and what are the implications for price forecasting? For example, our tactical algorithms have most recently "nailed it" (AAPL) and "gotten nailed" (FB). Technical analyses sensed something in AAPL, but were 180 degrees off in FB. Why one and not the other? Could Apple's earnings (or at least an inkling of them) been in the market, whereas Facebook's were a total surprise? The market reactions suggest both were a surprise, but yet there were clues with one and not the other.

Here's a link to what we saw or didn't see.

There are many factors which can be used to explain price activity. Among them are price momentum and sentiment, both of which can be modeled by a practitioner or his computer. Somehow someone gets the inkling, real or imagined, that the wind is about to change direction, and either acts accordingly or just declines to follow the well-trod path. Then change happens. It is inexorable, almost evolutionary.

Freely traded markets are very efficient, but not perfectly efficient. That's why "technical analysis" or "counting" works, at least some of the time. Information leaks out and it shows up as a marginal change in the price. Could some companies better enforce a no-leaks policy than others? Maybe. But information can get out in other ways. For example, Apple has stores that are usually crowded.

Suppose all of a sudden they aren't crowded; that's a tell that can be modeled. The people who watch the stores will know before the earnings are released. Okay, then how do you do that for Facebook?

Facebook's revenues and earnings (i.e. fundamentals) are hard to model from the outside. We don't know of any tells. And they may have a rigorous no-leak policy. Which other companies have those same characteristics?

If you look in your program, both companies have similar profiles with regard to share statistics. That is, they have similar relative percents held by institutions and insiders. Their shorts as a percentage of float are similar. However their old school analysis characteristics are different; no one buys FB for the dividends.

Great quote from Robert Schiller: "We should not expect market efficiency to be so egregiously wrong that immediate profits should be continually available." That is both true and comforting when we are licking our wounds. If you have an edge, it's a small one, so diversify or watch the size of your bets.

But no matter how good you are at modelling momentum and sentiment, random things can screw up the forecast. Suppose that all of your algorithms identify a stock that is headed upwards. Then the company's corporate jet falls out of the sky with the executive team on board. That stock is going down, damn the forecast.

To us this is both a practical issue (our bank account) and a philosophical one (our minds). We would appreciate any and all ideas.

BTW, if you want to play with the algorithms yourself, send me an email and I will send you a link.


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