Rough week for the Livermore this week. (Both the NDX and OEX version… I’m a subscriber.) Do you think that during strong, extended rallies (like we’ve had over the past few months), the index becomes “polluted” with high-beta names. In other words, as I understand it, the goal of the index is to identify the strongest and most trending stocks in order to generate alpha. In a choppy or down-trending market, this may work as expected. But perhaps after a strong many-month rally, those names which appear to be the strongest are simply those with the highest beta, and will actually become the weakest if the market flips?
Interested to hear your thoughts on this. I’ve read your posts on rotation and beta-surfing, so this effect may be intended… Not sure how to think about it myself.
hi bmb, to follow up on what jeff was saying, there is in fact a “filter” if you will that is called the LTR which looks at the trendiest stocks–that have little noise/trend. these stocks when matched with other factors generally isolate the stocks with the highest real alpha (not to be confused with actual alpha which has much less predicted power). regardless of what strategy or metric is used (sharpe, return/vol, return/beta etc) there is no way around the fact that once a strategy has significant excess returns versus the benchmark in a short time period it is destined to come back to earth. in the case of the livermore, it was literally going straight up over the last two months. the rate of change in excess return was incredible–especially for the newer/institutional variants. more on this analysis of the equity curve of excess returns to come….for subs that is.
note that i am discussing excess returns simply because I always recommend a hedged livermore, and if not hedged than at least one with stops/trailing stops. to me being long only in these stocks with no protection is asking for a wilder ride than most people can actually tolerate. hedging makes it far more stable–and indeed the hedged version on the site lost only 2.7% over the past week–much better than the broader markets which lost close to 10% or more.
I’d be surprised if DV didn’t have a noise reduction factor included. However, it seems to me that the index’s trading leverage has increased dramatically since early in the rally, so it has to have become somewhat inevitable. Complete outside take since I don’t know the secret sauce! JP
According to David V the Livermores tend to get pummeled in the transitions at key turning points. Once the new trend is established and the Livermores adjust, it’s back to business. Looking back, the only other time the NDX has run up so hard, so fast was in 2000. When that market rolled over in March 2000 the Livermores were hammered. After adjusting to the change in trend they came back in April 2000 in a big way. Not saying the market is necessarily rolling over here, but it helps me as a trader of these stocks to be aware of how they behave under certain market conditions.
hi dave, indeed you are absolutely correct. there is no mechanism to ensure that the livermore will constantly perform better at each point/market state—but as a generality it performs best most of the time and does lag mainly at tops, versus at bottoms. it also does not perform as well below the 200ma but still makes a profit versus the hedge most of the time.
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