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Livermore Active Issues Index for Friday, March 18th

March 18, 2011

2 Comments leave one →
  1. Sweeler permalink
    March 18, 2011 3:32 pm

    David,

    Good to see you active on the blog again.

    You have been posting the Livermore for well over a year, and thus far it has vastly underperformed its historical backtest. Obviously, one year doesn’t mean a whole lot in the grand scheme of things, but I can’t help noticing a steady decline in performance in the performance since 1998 (excluding 2009). I wonder if you have put much thought into this?
    My thoughts:
    1. the market has become less of a market of stocks and more of one big stock market where stocks tend to move in unison, potentially due to the growing popularity of ETFs
    2. momentum strategies are becoming more popular and it is harder to gain an edge now than it was 10 years ago
    3. I’m overreacting and it’s quite common for the Livermore to go flat for extended periods

    Thanks,
    Dave

    • david varadi permalink*
      March 21, 2011 4:34 am

      hi sweeler, first of all the blog Livermore is distinct from our proprietary strategy that we license to institutions and other individuals. that version is up 24% net of the hedge for 2010 and down about 2% for 2011. that said the blog version is still gaining alpha of close to 10% versus the hedge, and unhedged is doing very well. That said you are correct on several fronts: 1) the trendline of yearly and month returns is sloping downwards over time—this is a function of several factors: a) correlations have risen consistently over time and there is less opportunity to find stocks that are bucking the market trend. b) momentum strategies from simple to complex have deteriorated consistently over the last 10 years due to the introduction of the short-term mean-reversion effect and also the higher correlations. Still, like trend-following, it is expected that there will be periods of time that last years where the performance isn’t as good. Correlations will also eventually mean-revert as they have done so for the past 40 years. I expect that when the market and economy are finally healed and the NASDAQ comp breaks to new ground, we will see correlations drop and trend strategies gain steam welcoming a fresh bull market. However, we many not see this for several years. That is why I still favor having short-term swing strategies as well. But trading the Livermore is great diversification as it is robust across markets and time frames and should do well like in 2009 (up triple digits) while mean-reversion struggled.
      best
      david

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