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TECHNICAL STRATEGIES QUARTER IN BRIEF: CORE ASSET ALLOCATION REVIEW Q3 // 2014
EOGHAN LEAHY, CMT, MSTA
MAURIZIO PIETRINI, MSTA
GUIDO RIOLO, MSTA
OLIVER WOOLF, CAIA, CMT, MSTA
PAUL CIANA, CMT
GREG BENDER, CMT
<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
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2
Bloomberg BRIEF: Technical
Strategies Quarter in Brief
Contributors
Eoghan Leahy, CMT, MSTA
Ph: +44-20-7392-0599
Maurizio Pietrini, MSTA
Ph: +44-20-7073-3666
Guido Riolo, MSTA
Ph: +44-20-7330-7211
Oliver Woolf, CAIA, MSTA
Ph: +44-20-7073-3148
Paul Ciana, CMT
Ph: +1-212-617-8229
Greg Bender, CMT
Ph: +1-646-324-3169
“Implied volatility across markets registers multi-year lows
hitting levels not seen since before the Global Financial Crisis.”
CONTENTS
1. ABSTRACT AND CONTENTS Eoghan Leahy, Oliver Woolf, Gudio Riolo
2. GLOBAL MARKET OVERVIEW Eoghan Leahy, Oliver Woolf, Gudio Riolo, Greg
Bender, Maurizio Pietrini
3. GLOBAL EQUITY MARKETS
Eoghan Leahy, Oliver Woolf, Paul Ciana
4. RATES AND FX
Oliver Woolf
1. COMMODITIES
Oliver Woolf
6. BRIEF MARKET SPOTLIGHT
Guido Riolo
7. BLOOMBERG SENTIMENT SURVEY
Guido Riolo, Jennifer Warren
8. STRATEGIES IN BRIEF
Oliver Woolf, Maurizio Pietrini
9. EXPERT BRIEFING
Lex Van Dam
10. APPENDIX AND DISCLAIMER
ABSTRACT The high correlation and extreme low volatility across asset classes continues as the implied volatility
across markets registers multi-year lows hitting levels not seen since before the Global Financial
Crisis. US and European CDS continue to fall with the spread between the two now virtually zero.
Meanwhile rate increases have been sharper in Europe over the quarter. Sterling remains strong
versus the US Dollar while the Euro has pulled back significantly from its 52 week highs.
Equity markets continue to push higher although the Euro Stoxx is starting to show short term signs of
weakness. There seems to be a shift in the emerging market space with BRICs starting to look
relatively more attractive as investors rotate out of peripheral European indices which have been
strong for several quarters. Russia and India have performed very well over the last quarter.
Meanwhile Dubai and Saudi Arabia look to be recovering from a sharp yet healthy correction.
The commodity space is interesting with several markets such as copper, gold and silver testing long
term resistance levels. There appears to be a rotation out of agricultural commodities such as wheat,
corn and cotton into industrial metals like nickel, copper and silver which have been significant
relative underperformers.
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OVERVIEW EQUITIES 3
1. Blue/red signals from Volstall indicator 2. Painted bars from triple moving average crossover 3. Lower panel is Fisher Transform with Squeeze
Chart 2
Chart 3 Chart 4
S&P continues to drive higher however the recent Volstall signal and Fisher
Transform divergence suggest waning momentum in the near term. The uptrend continues, TEMA is still bullish however there is a Volstall
exhaustion signal. Fisher still bullish.
TEMA remains bullish as the Euro Stoxx continues to drive higher.
Fisher starting to mean revert suggesting weakening momentum. Daily Euro Stoxx 600 looking negative. TEMA has turned bearish
following a recent Volstall signal. Potential rising wedge pattern.
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OVERVIEW FIXED INCOME 4
1. Blue/red signals from Volstall indicator 2. Painted bars from triple moving average crossover 3. Lower panel is Fisher Transform with Squeeze
Chart 1 Chart 2
Chart 3 Chart 4
Downtrend channel has been broken by strong recent move higher that
saw a very extreme Fisher reading of 7.5. However Fisher mean
reversal highlights loss of momentum.
Daily TEMA negative also as the US 10 year continues to trade between
122 and 127. Volstall marking reversals nicely. US 10 Year continues to trade in a tight consolidation range. TEMA
remains negative and uptrend support has been broken.
More bullish outlook in Europe as weekly trend is up as confirmed by
TEMA. However Fisher mean reversion suggests waning upside
momentum.
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OVERVIEW FX 5
1. Blue/red signals from Volstall indicator 2. Painted bars from triple moving average crossover 3. Lower panel is Fisher Transform with Squeeze
Euro failed dramatically at the key psychological 1.40 level. TEMA is
now negative following a Squeeze signal. Break of uptrend support
would likely result in a sharp move lower.
GBP continues to surge higher. TEMA remains positive and Fisher
continues to stay at elevated levels. No signs of weakness yet on
weekly indicators.
Daily chart of GBP is showing some early exhaustion signals, there is a
Volstall exhaustion signal but given the strong weekly signals this is less
significant. TEMA remains bullish and uptrend is intact.
Chart 1 Chart 2
Chart 3 Chart 4
Weekly Squeeze signal fired short as Euro has reversed lower. TEMA
has now turned negative and the uptrend support is currently being
tested.
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OVERVIEW COMMODITIES 6
1. Blue/red signals from Volstall indicator 2. Painted bars from triple moving average crossover 3. Lower panel is Fisher Transform with Squeeze
TEMA remains bullish despite recent pullback. Should uptrend
support hold then retest of 2013 highs looks likely. Support around
psychologically significant $100 level will be key.
Having found support at the key 300 level, Copper is now driving
higher to test its long term downtrend. TEMA is positive and Fisher is
increasing in support of the move.
Chart 1 Chart 2
Chart 3 Chart 4
Daily chart of Crude is more bearish. TEMA is negative following Volstall
signal at recent high. Fisher now negative. Confluence of uptrend and
horizontal support around $100 mark likely to provide some support.
Daily TEMA is also bullish and extreme Fisher reading supports
strength of the recent move but is starting to mean revert. Volstall
signal right at downtrend suggests resistance may hold. Key level.
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OVERVIEW PRECIOUS METALS 7
1. Blue/red signals from Volstall indicator 2. Painted bars from triple moving average crossover 3. Lower panel is Fisher Transform with Squeeze
Multiple Volstall signals at horizontal support marked the lows. Strong
move higher has broken downtrend but like Gold we have a negative
Volstall signals and potential flag. Perhaps a pause before a surge higher.
Chart 1 Chart 2
Chart 3 Chart 4
Gold starting to look more positive. TEMA has turned bullish, Fisher
has turned positive and the price is once again trading above the
prior downtrend resistance which now looks to be offering support.
Recent blue Volstall signal may mark the right shoulder of an inverse head
and shoulders pattern. However upside momentum has stalled as signalled
by red Volstall indicator. Potential near term bullish flag continuation pattern.
Silver finally looks to be mirroring the strength of Gold which is
bullish for both markets. TEMA is now positive and long term
downtrend is broken.
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OVERVIEW VOLATILITY 8
4. Volatility bands
Chart 1 Chart 2
Chart 3 Chart 4
The S&P 500 gained nearly 4% in Q2 and the VIX fell to its lowest
levels since 2007. The 12 level was considered the floor for volatility –
the new floor may be closer to 10.
Implied volatility of Treasury options continued to trend lower in Q2. The
spikes in early April and June were quickly retraced by lower lows. The
MOVE finished Q2 by tagging the -3SD Bollinger Band – the lowest reading
since May 2013.
Currency volatility was under its 60 day moving average every day of
Q2. An all-time low was reached on June 19th.
The implied volatility of the United States Oil Fund ETF made another all-
time low in early June but quickly rebounded to tag the +1SD Bollinger
Band. Bandwidth (distance between bands) has reverted to more normal
levels as some volatility has returned to volatility.
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OVERVIEW VOLATILITY 9
4. Volatility bands
Comments…
Conclusions
Chart 1
Chart 3
Gold volatility continued to trend lower in Q2, tagging the -3SD band
multiple times. Like crude oil, bandwidth is slowly starting to widen.
Below is a normalized chart of the past quarter of the relative
implied volatility of all five asset classed covered in this
section.
The theme for Q2 has been quiet markets with low volatility
and low volumes. After a brief correction in April, the S&P 500
has established a strong bullish trend. The widely followed
VIX, which has a strong negative correlation to equity prices,
has drifted lower.
Treasuries and currency markets have been largely range
bound and in tight ranges following benchmark U.S. interest
rates.
Commodities have slowly started to diverge and show some
volatility relative to equities. But historically volatility is still low
on an absolute basis.
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OVERVIEW ASSET CLASS TRENDS 10
Virtually every market across the asset classes covered in the Quarterly has been up over the past two quarters. The two
exceptions are copper which is reversing up and the euro which is reversing down. The risk on phase continues and the
extreme levels of correlation between markets remains. Bonds continue to advance despite the strong gains seen in equity
markets. These intermarket relationships are slightly unexpected and unlikely to last forever.
5. World Trends Graph
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OVERVIEW ASSET CLASS TRENDS 11
The weekly Relative Rotation Graph (RRG <GO>) highlights some interesting divergent relationships between securities within the
same asset classes. The Euro has been very weak and is now in the lagging quadrant, however Sterling remains strong and is still
leading. Both the US 10 year and the Bund are leading with equities which is interesting. There is also a recent divergence in relative
price and momentum between the S&P and the Euro stoxx which may be driven by the weaker Euro. Meanwhile we have Oil
consolidating within the leading zone while copper is improving, Finally, both Gold and Silver are improving together however for the
first time in months Silver has been improving relative to Gold which may be bullish for both precious metals.
6. Relative Rotation GraphsTM
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GLOBAL EQUITY MARKETS 12
6. Relative Rotation GraphsTM
There have been some interesting rotations taking place over the last quarter in the emerging market space. Dubai has seen a
sharp sell offs which can be expected following the huge move it has enjoyed following the classification upgrade from frontier
status. European peripheral markets have been relatively weak with Portugal, Ireland, Greece in the lagging quadrant with Spain
and Italy weakening too. The BRICs are showing some relative strength with Russia in particular looking interesting as the
INDEXCF is poised to move into the outperform quadrant having been a strong relative laggard just a few weeks ago.
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GLOBAL EQUITY MARKETS 13
7. Scatter plot chart
The Scatter chart shows 3 month price performance (X axis) versus 1 year price performance (Y axis). The market colours show
the level of volatility as depicted by the Bollinger %B which refers to the distance between the upper and lower Bollinger bands;
wider bands give higher values and suggest more volatile markets. Finally the marker size represents 60 day volatility. Last quarter
we highlighted the performance persistence amongst the indices as they were displaying a positive regression between the
quarterly and annual performance. This relationship has broken down this quarter as we have seen the fortunes of several markets
reverse. The two strongest performers the MERVAL (extreme currency devaluation) and the DFMGI have also been the most
volatile. The DFMGI has pulled back over the last quarter but has still been an incredible performer over 12 months and is
showing sings of recovery (see the market breadth section). The recent underperformance of the European peripherals is clear.
While, the Russian INDEXCF and Indian SENSEX have performed well over the quarter.
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GLOBAL EQUITY MARKETS BREADTH 14
8. Market breadth indicators
Above is a Scatter Plot Chart (GS <GO>) of global equity markets with several Bloomberg market breadth fields applied. We
compare the 3 month price performance (Y axis) to the percentage of shares above 50 day moving averages (X axis), the market
colour denotes the percentage of stocks in each index with RSI above 70 while the marker size shows a relative value of the
percentage of securities that have given MACD buy signals over the past 10 days. The stand out performers have been Russia and
India, both had the biggest price gains over the quarter and highest percent of members above the 50 day moving average. The
majority or indices have shown moderate gains without extreme readings on RSI breadth or percent above 50 day MAs. The
peripheral European stocks have been weak and are clustering around the lower left corner of the scatter chart. Both the Dubai and
Saudi indices have sold off sharply but are showing signs of recovery as they are registering the largest percentage of MACD buy
signals in the last 10 days, which can be visualised by the larger size of their markers.
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8. Market breadth indicators
Analysing Russia and Dubai in more detail highlights how the market breadth tools can be used to spot turning points. The Russian
Micex formed an inverse head and shoulder pattern that was met with an extreme low reading on the percent of stocks above 50 day
SMA and then a huge spike on the percentage of MACD buy signals. The index is not testing resistance with an extreme reading on
the percent above the 50 day SMA and potentially some bearish divergence on the percent of members overbought on RSI. There is
a similar setup in the Dubai DFMGI as the percent of MACD buy signals is above 80 while the percentage of stocks above the 50 day
SMA is sub 10 which is an extreme low reading. This may signal a significant low has been established.
GLOBAL EQUITY MARKETS BREADTH
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RATES & FX 17
The top right chart demonstrates that interest rate increases have been sharper in the Eurozone over the last quarter, with the
shorter end of the US curve seeing marginal decreases. However, the anticipated rise in rates over the coming year from the
implied curves (US bottom left, EU bottom right) is less aggressive than 1 quarter ago when the 1 year forward implied rates
for the 10 year tenor were around 3.25 and 2.25 for the US and EU respectively (now c. 3.07 and 1.70).
9. Implied forward curves 10. Historical curves
The benchmark US (black) and European (orange) CDS
indices continue to fall and the spread between the two
(lower panel) is now virtually zero.
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RATES & FX 18
The Market Picture diagram above highlights levels that have been particularly actively traded for DXY Index over the past 6
months. Here each letter represents a day of the month starting with A for 1st (as opposed to its customary use where each
letter represents an intraday interval, usually 30 minutes). The histogram on the left is an overlay of all 6 months in the chart.
Last quarter (looking 6 months back) the overlay identified 80.6 as the most traded level and subsequently this became
resistance in both April and May. Although this level broke on the upside in the first days of June in then failed at its monthly
price projection, marked by the dashed black line (high + |mid-point - POC| * 2), and retreated to the middle of May’s value area
(70% of activity denoted by the horizontal blue lines). The range bound nature of the DXY over recent times is reflected by the
normal distribution of the overlay on the left, the apex of which, marked by the horizontal red line, is circa 80.2. This is the level
at which the DXY seems to have found acceptance currently.
11. Market Picture
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FX & RATES 19
In line with recent GBP performance the CFTC net large speculator
position is the most positive it has been since 2007 (bottom panel)
and the 25D Risk Reversal has risen accordingly. In contrast the
net speculator position for EUR (top panel) is the most negative it
has been for over a year. However, the falling EUR is contradicted
by its 25D Risk Reversal which has been rising of late.
The analyst consensus for the end of Q3 is over 2 big figures lower
than the forward for EUR (top) and over 1.5 lower for GBP (bottom ).
Both implied probability bell curves are fairly normally distributed. In
the case of the EUR the curve is slightly translated to the right which
would could have mildly positive connotations
12. Sentiment and positioning 13. Implied probability forecast
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RATES & FX 20
2. SEK is the only currency to have a positive implied – realized
spread (3m) despite being the only one to have seen an increase in
realized volatility in over the last quarter (albeit marginal).
14. World Currency Ranker 15. Correlation Matrix
1. Despite having the worst spot returns amongst the G10 group over
the last 3 months SEK and NOK are forecast to be the major
outperformers for the remainder of the year.
3. Of the countries that have USD denominated CDSs, AUD and
NZD, which have also had positive spot returns, have seen the
greatest drop in CDS levels. Only CHF has experienced a CDS rise.
4. Correlations vs. USD
Strongest positive – EUR & DKK
Strongest negative – N/A
Weakest – AUD & CHF
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The Relative Rotation Graph (RRG<GO>) depicts a significant change in the fortune of different commodity groups over the
last quarter (source is the new BCOM Index, formally the DJ-UBS Index). Whereas in April the agricultural commodities looked
as though they were beginning to outperform they have since seen a significant downturn in relative fortunes, wheat, corn and
cotton being amongst the laggards. On the other hand, the industrial metals, which were the major underperformers previously,
are increasingly exhibiting strength. Despite a drop in momentum, nickel is the leading performer, whilst copper, silver,
aluminium and zinc are all showing signs of improvement.
NG1 Nat Gas
BO1 Soybean Oil
LC1 Live Cattle
CO1 Brent Crude
HO1 Heating Oil
C 1 Corn
S 1 Soybean Oil
LH1 Lean Hogs
LMNIDS03 Nickel
XB1 Gasoline
SM1 Soybean Meal
GC1 Gold
SI1 Silver
KW1 Winter Wheat
HG1 Copper
LMAHDS03 Aluminium
CL1 WTI Crude
W 1 Wheat
CT1 Cotton
SB1 Sugar
LMZSDS03 Zinc
KC1 Coffee
6. Relative Rotation GraphsTM 16. BCOM Index
COMMODITIES BCOM INDEX
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COMMODITIES BCOM INDEX 22
The scatter plot from GS<GO> shows the 3 month percent change on the X axis versus the 60 day rate of change of aggregate
open interest on the Y axis for the constituents of Bloomberg’s new BCOM Index (formerly DJ-UBS). Last month the huge open
interest hike anticipated the outbreak of a large upward move for nickel. This time round it is heating oil, followed by gasoline and
gold which have the larges rates of change in open interest. The colour scheme and sphere size represent the Bollinger %B
(position within the bands) and 60 day realized volatility respectively. In this light zinc is moving particularly strongly whilst nickel
and coffee (large blue sphere) - both of which were shown to have lost some momentum in the Relative Rotation Graph – are the
most volatile.
NG1 Nat Gas
BO1 Soybean Oil
LC1 Live Cattle
CO1 Brent Crude
HO1 Heating Oil
C 1 Corn
S 1 Soybean Oil
LH1 Lean Hogs
LMNIDS03 Nickel
XB1 Gasoline
SM1 Soybean Meal
GC1 Gold
SI1 Silver
KW1 Winter Wheat
HG1 Copper
LMAHDS03 Aluminium
CL1 WTI Crude
W 1 Wheat
CT1 Cotton
SB1 Sugar
LMZSDS03 Zinc
KC1 Coffee
6. Relative Rotation GraphsTM 16. BCOM Index
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In the first week of July the VIX has reached a low of 10.28,
a level not seen since February 2007. While most people
would agree that this level of volatility is unusual and
unsustainable, timing the upward reversal could be a tricky
affair without the appropriate tools.
One toolkit often associated with market timing are the
DeMark Studies, developed by Tom DeMark over a career
that spans over 40 decades. Of the many indicators
available we will focus on TD Sequential and TD Combo.
The purpose is not to teach calculation or interpretation, for
which we would suggest contacting DeMARK Analytics via
the Bloomberg function DEMA<GO>.
BRIEF MARKET SPOTLIGHT
The studies comprise two phases: the first one,
identical on both, is called TD Setup, it is numbered in
green and it is momentum based; the second phase,
TD Countdown, is the more directional phase and it is
normally in red and magenta respectively. However,
for the purpose of this publication Combo countdown
will be in blue instead. A setup 9 tends to indicate an
increased chance of a correction, a countdown 13
indicates the current trend is vulnerable.
The daily chart of the VIX (above) shows a sequential
13 formed back in December and a combo 13 in May,
with the recent lows showing a disqualified breakout to
the downside, one that is more likely to fail than
succeed. The weekly chart (left) shows a sequential
13 from April 2013 and a setup 9 from last May.
Overall the signals on the VIX suggest a potential
base is forming.
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24 If instead of using the VIX Index which does not actually
trade, we will now concentrate on the traded future on
the VIX. The future contract used is the continuation UX1
Index. As this is a traded instrument it should better
capture and reflect the psychology of market
participants. Generating clearer trading signals.
On the daily chart (top right) a quick visual examination
seems to confirm this assumption. The reversal last
summer was heralded by a combo 13,confirmed a
couple of months later by setup 9. The subsequent rally
came to an abrupt end on a sell setup 9. The next 3
turning points, in November, February and April were
also identified.
More advanced DeMark users will also appreciate the
finer points, such as the touching of the Risk line one
year ago and again at the turn of the year. Also, the
rejection of the TDST level last October before breaking
the level in February as well as the pull back on the
previous support TDST, which had turned into a
resistance, this June.
If we look at the current developments on the daily chart
(bottom right) , the sequential completed a 13 on the 9th
of June; whereas combo, in blue, completed its 13 on the
19th of June. Suggesting a potential exhaustion of
downside momentum provided the TDST risk levels
hold.
The risk level for the first signal, at 12.70, has been
challenged many times since it’s completion, but the
breakout was never qualified and therefore never
suggested an increased chance of continuation on the
down side. The risk line for combo came at 12.10 and
has not been tested at the time of going to press.
BRIEF MARKET SPOTLIGHT
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25 BRIEF MARKET SPOTLIGHT By using the futures contract instead of the VIX, we also get interesting readings on the weekly and monthly timeframes. The weekly
chart (below left) shows a combo 9-13-9 formation, which often signals exhaustion after an extended move suggesting a larger counter
trend move may be at hand. There is also a second 13 at the beginning of June 2014 which confirms the potential reversal scenario.
There is also a sequential 13 from the end of March whose Risk line has been touched last week by the setup 9 bar.
The monthly chart (bottom right) also shows a sequential 13 two months ago in May 2014, however combo currently on 11 might
require another two months to complete the count. These signals suggest a reversal could take place imminently but may need a few
more months before the combo signal will confirm the 13 on the sequential.
Having analysed both the VIX and the VIX future (UX1) using the DeMark indicators across several timeframes it looks like a base is
being formed,. The daily charts are potentially displaying all the hallmarks of an imminent change of trend. However, we should not
underestimate the lack of completion on the monthly combo which may take two or more months to complete the 13 count, suggesting
a potential lower low may be seen before a reversal higher.
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On December 17th, 2013, Bloomberg hosted the first Annual Technical Analysis Summit, in the London headquarters. During the
course of the event we disseminated a questionnaire on views of the financial world for the quarter to come. As we go forward, we
would like to ask you again about your views. Results will be available on the Bloomberg Quarterly Brief, which can be downloaded
for free under the function BRIEF<GO>. If you are interested in taking part, please contact a member of the team listed on the front
cover of this publication.
The questionnaire was broken down by assets and regions, with 6 of each. In detail we asked: Risk (on or off), and then up or
down for the S&P500, oil, gold, dollar index and 10 year rates, without specifying the currency, leaving people to decide what was
the most important rate in their mind. We then asked which regions were going to be most appealing in the next quarter: US,
Europe, Japan, BRICs, Emerging markets and Frontier markets.
In total we got 96 answers, from a universe
selected without any statistical filter.
The first picture is a breakdown of the view of the
markets. The highest conviction was on bullish
oil, with around 65%, up from 45%. During the
same time, Nymex oil was largely unchanged,
but with a 10% swing low to high. Risk-on and
Gold up were both selected by 56-57% of
respondents, 3 points up and 3 points down
respectively from the previous quarter. The price
of gold dropped almost 2% since the previous
survey, with a 10% swing, high to low.
The percentage of bulls on dollar and rates, both
around 55%, came down from 73% and 65%
respectively. The dollar barely changed, whereas
US 10yr rates dropped 1.8% or 6bp. S&P views
remain very balanced, with the narrow bullish
lead seen 3 months ago switching now to the
bearish side, with downward pressure now
expected by 52% vs 48% 3 months ago. Of the
assets under observation, the S&P500 was the
one with the best performance since the last
survey, with a +6.91% at time of going to press.
BLOOMBERG QUARTER IN BRIEF (QIB) SENTIMENT SURVEY
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The main story in the geographic
breakdown was that Europe recovered
second place behind the US. Europe
rose from 25% 3 months ago to 36.7%,
just 1 point behind the US. Emerging
markets stayed stable within the views
of our respondents, going from 26% to
27.5%.
Japan’s chances of outperformance
also improved markedly, almost
doubling from 10% to a shade less
than 20%.
BRIC countries prove difficult to
predict, going back to around 6% of
preferences, where it was in January,
before popping up to around 12% last
quarter.
Obviously the sum is not meant to be
100, as multiple selections were
allowed
Among dollar bulls, once more Japan showed an improved appeal, the only country to increase the preferences among
respondents who saw the dollar index up. Japan went from 9% to 19% by stealing 5 points from the US, 1 point from Europe, 4
points from BRICs. Emerging Markets and Frontier Markets were unchanged at 22% and 3% respectively.
Among rates bulls again the big story was the recovery in expectations for Europe and Japan, at the expense of the US (down
from 38% to 27%) and BRICs, down to just 1%. Emerging markets remained substantially unchanged, moving from 25% to 24%,
but crucially moved to 3rd place, behind the US and Europe
See charts overleaf
BLOOMBERG QUARTER IN BRIEF (QIB) SENTIMENT SURVEY
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Dollar Up Rates Up
Risk On Risk Off
The next level of analysis was done by qualifying the regional choice based on the views on risk and, displayed on below. Among
risk-on respondents, 35% saw Europe as their main performance area. An interesting, if counterintuitive, detail that transpired is that
there are more Risk-off respondents expecting Emerging Markets to do well (23%, 2nd position) than there are Risk-on with the same
view (19%). Risk off-Japan bulls increased from 7% last quarter to an impressive 19%, pushing Europe in 4th place with 17%
BLOOMBERG QUARTER IN BRIEF (QIB) SENTIMENT SURVEY
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STRATEGY IN BRIEF 29
True Strength Index (Double Momentum)
The True Strength Index (TSI) was created by William Blau and introduced in Stocks and Commodities magazine. It is an
oscillator calculated as the ratio of a double smoothed 1 day net change divided by a double smoothed 1 day absolute
change. An exponential average is then applied to the ratio in a similar fashion to the MACD indicator.
The formula which can be replicated via .Lite in
STDY<GO> is:
Double Smoothed PC
PC = C - C>>1;
FS = EMAvg(PC, 23);
SS = EMAvg(FS, 13);
Double Smoothed Absolute PC
absPC = Abs(PC);
aFS = EMAvg(absPC, 25);
aSS = EMAvg(aFS, 13);
TSI
TSI = 100 * (SS / SSa);
Signal
Signal = EMAvg(TSI, signal);
As seen in the chart below, the double exponential
smoothing technique of the TSI (middle panel) results in
a very similar output to the MACD (lower panel).
However, a key benefit of the TSI is that it is scaled,
thus making it easier to identify extreme (perhaps
overbought / oversold) levels, and also to draw
comparisons across different securities.
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STRATEGY IN BRIEF 30
The TSI Double Momentum strategy is as follows: as a trend filter, only longs can be taken when TSI is greater than 0 and
only shorts when TSI is less than 0. The entry and exit points are then generated by the crossovers between the TSI and its
Signal line. As it is a medium to long term trend following strategy a weekly periodicity is employed.
The chart of the S&P 500, below, is colour coded to depict where the trades would occur – the blue bars represent the long
trades and the red the short.
Although this strategy could be easily replicated with the MACD, the benefits of the TSI are obvious from an observational
perspective. For example, the TSI resistance at the overbought level twice marked exhaustion in 2012, whilst the
subsequent support at the same level in 2013 and 2014 highlighted trend strength.
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STRATEGY IN BRIEF 31
Once the study has been created in STDY<GO> the strategy can easily be built and tested in BT<GO>. Just select the TSI
from the User Defined Studies and then copy the rules as per the image below.
No stop loss has been added as the exits on the bearish crossovers ensure that any drawdowns are limited, whilst the >0 /
<0 filter ensures that trades are never taken contrary to the direction of the major trend.
From the Simulation Control tab the strategy assumes an initial capital of $100,000, and the simulation window is the last 20
years on a weekly basis, thus a substantial testing period.
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STRATEGY IN BRIEF 32
The results below demonstrate that the strategy produces steady gains over time.
Although out of 39 trades over the 20 years there are marginally more losing than winning trades, the average winner is just
over twice the average user and, most importantly, the strategy substantially limits the drawdowns. The greatest loss over
the period is reduced to 26.41% in contrast to drops of over over 50% in the S&P over the same interval.
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STRATEGY IN BRIEF 33
However the real benefit of the strategy becomes apparent when it is diversified over a basket of indices.
The chart below is the cumulative profit with an initial $100,000 investment in all the 18 major global equity benchmarks from
the front page of WEI<GO>.
What is extremely impressive is not only the consistency of the gains but also the smoothness of the equity curve.
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EXPERT BRIEFING 34 Lex Van Dam is a Dutch hedge fund
manager based in London. In his 20+
career he has worked at Goldman
Sachs, GLG and is currently at
Hampstead Capital.
In 2009 he featured in the BBC2
programme "Million Dollar Traders"
where eight ordinary people were given
the training and capital to trade the
stock market. In November 2010 Lex has
launched the "Lex Van Dam Trading
Academy“ - www.lexvandam.com
How would you describe who you are
and what you do?
I have been trading and investing for a
living since 1992, and currently I am a
partner in a hedge fund, which also has an
excellent long only strategy. Aside from
that, I also run an online trading academy,
teaching other people how to trade and
invest in stocks and currencies.
What attracted you to the financial
markets?
I love the financial markets because they
are continuously moving so it is always
intellectually stimulating to be involved with
them, and because you are only ever as
good as your last trade, you need to keep
reinventing yourself and develop new skills.
Please describe your approach to
understanding the markets, do you use
technical analysis, fundamental analysis
or both, please explain why?
As a common thread in my trading and
investing I use a process called 5-Step-
Trading® which makes sure I don’t listen to
rumours or copy other traders, but instead I
focus on coming up with my own original
ideas, which helps me avoid consensus
positions. Also, the fact that I understand
the stocks I invest in helps me decide when
a stock moves against me whether I should
cut or hold on, as I am much better able to
judge news flow. That would be much
harder if the original investment idea wasn’t
mine. 5-Step-Trading® uses both
fundamental as well as technical analysis,
so I use both.
What technical analysis techniques, if
any, do you favour?
When investing, it is super-important to be
able to interpret charts and patterns. They
tell you the story of a stock and point out
historical demand and supply patterns,
which is a pretty important driver when you
are trying to get a feel of what might
happen to a stock in the future. They help
me optimise my trade entry timing, and help
me set profit targets and stop losses. When
it comes to specific technical analysis I also
try to understand what drives other purely
technical traders, so when I look at, for
example, Japanese stocks or the Yen, I
would look at Ichimoku clouds, while for
Dutch stocks I would be more interested at
looking at Windmill patterns, which are
based on rotating matrixes. But the bottom
line remains that you first need to make a
judgement if a stock is ranging or trending.
Do you use automated systems or rely
on judgment?
We have a very strong process for stock
selection. It is our own proprietary tool
which ranks stocks based on their exposure
to a large range of fundamental drivers and
valuation metrics, and ends up giving us a
‘buy’ list of those stocks with attractive
fundamentals that are relatively cheap. Our
goal is to have a portfolio of stocks that we
are happy to hold even when the market
turns down. We are definitely not
momentum players. Basically we use
automation to screen for attractive names
but at the end of the day the decisions will
be made by human beings and not
computers.
What timeframes do you favour,
historical, intraday or a combination of
both?
It really depends on the timeframe of my
opinion: for trading, less than two weeks;
for investing, at least 3 to 6 months.
Do you use a trading system? If you do
what are the key statistics to consider
when evaluating one?
Yes, we do have a trading system in place
that is based on our proprietary tool, where
we look for buy entry points for the stocks
we like fundamentally, and for sell signals
for the stocks we don’t like. These triggers
can be trend reversals, but we also have
signals that look at a resumption of the
main trend when a stock has retraced. The
statistics we use to evaluate the
performance of our systems are mainly the
equity curve and the maximum drawdown.
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EXPERT BRIEFING 35
What is the least important aspect to
consider when building trading
systems?
Not sure what the least important aspect
is, but the most important aspect to
consider is the execution impact. As soon
as you start trading in any size high
frequency traders will front run you. The
first thing I always ask other portfolio
managers who suffer performance issues
is how they execute their trades and on
what venue. Often they have no idea and
that is exactly where the performance
issues arise as slippage can be huge. It
might not that much per individual trade,
but this can add up to a lot more than
people realise.
Do you employ portfolio management
and/or pyramiding techniques?
Of course. We aim to have a portfolio of
uncorrelated bets so that when one idea
goes against us we have plenty of other
that can make us some money. We do
scenario analysis and a key parameter is
of course the VAR of our portfolio. I don’t
normally average down, I want an idea to
work before adding to a position.
How important are drawdowns and
money management in your opinion?
Money management is key if you want to
build a business and survive in this
industry. It is about building up a track
record with low drawdowns and executing
what you set out to do, i.e. you need to
avoid style drift. Know your market, know
your investor.
What is your opinion/approach to
optimization?
I am an econometrician, so I do
understand mathematical equations, but it
is very easy to think that you are
optimising your process while in fact all
you have done is take on more risk, which
one day will end up really hurting you.
Understand your edge and your risk, and
then find the most efficient liquid way to
implement it.
What advice would you give to those
who are new to the financial markets
and want to become the next Tom Pelc?
Educate yourself as much as possible
about the markets, and realise that
winning traders don’t try to copy others,
but in fact have a great understanding of
themselves. Trading is a mental game,
which takes place between the ears.
Can we have the name of someone who
has impressed you during your career?
Fischer Black, the Nobel laureate. He told
me that he had run the performance
numbers on a very famous risk arbitrage
desk at a large investment bank, and
found that a passive risk arbitrage strategy
would have outperformed them. It taught
me that asset allocation is the ultimate
driver of returns and that there is a lot of
smoke and mirrors in this field.
Is there anything you would do
differently, if you were given a chance?
In this life nothing, but if possible in my
next life I would like to come back as a
bull. There must be something amazing
about being able to always be optimistic
about the future, despite the facts on the
ground.
Is the future all into algo trading and
automated systems or does human
intuition still have a role?
It depends on the regulator and the
exchanges and the end clients. There are
still too many fish in the pond serving as
food for the sharks. If it was automated
systems trading just against other
automated systems then it would end very
soon. But as long as many institutions
don’t understand that they de facto are the
raison d’etre for the automated systems,
and the exchanges profit from this, then
they will continue to exist.
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APPENDIX 36
1. The red and blue signals in the Overview section are an indicator called Volstall. It is our own indicator created in STDY<GO>. It uses the rate of change of
the moving standard deviation of price to identify possible reversal points through decreasing momentum. A guide to STDY<GO> as well as a forum can be
found within red toolbar in the function.
2. In the Overview section the bars are painted according to a triple exponential moving average crossover with averages of 4, 9 and 18. The blue and red
Volstall signals and painted bars are created in the strategy events. From a chart click on the events flag ,+Add Event, Browse then select option17)
Strategies & Studies.
3. The indicator below the charts in the Overview section is the Fisher Transform with Squeeze (Indicator outlined by John F. Carter) . The indicator uses a
Gaussian probability density function (Gaussian PDF) as opposed to a more traditional bell-shaped probability density function to calculate the position of
the price compared to its range (see TECH<GO>). Squeeze signals are shown as red bars and occur when the Bollinger bandwidth is less than the Keltner
band with signalling low directional volatility.
4. On the volatility charts we have used Bollinger bands with a 60 period moving average with upside deviations of 1, 2, and 3. On the downside we have used
1,1.5 and 2 standard deviations from the average, to reflect the inherent skew in volatility indices.
5. World Trend Graph can be found at WT<GO>
6. Relative Rotation GraphsTM can be found at RRG<GO>. Relative Rotation GraphsTM of Relative Rotation Graphs Limited. See
www.RelativeRotationGraph.com . Please see DOCS 2063266<GO> for more information.
7. The scatter plot chart can be found at GS<GO> and allows for the visualisation of 4 unique sets of data.
8. More information on Bloomberg’s Market Breadth indicators across 54 different markets can be found at DOCS 2068663<GO>
9. Implied forward curves can be charted in FWCM<GO>
10. Historical curves can be charted in GC<GO>
11. Market Picture can be found at MKTP<GO>. For more information on mechanics of Market Picture hit the HELP key from within the function.
12. Sentiment and positioning data can be located at IPSP<GO>
13. Implied probability FX forecasts are derived from FX options and can be found at FXFM<GO>
14. The World Currency Ranker can be found at WCRS<GO>
15. Correlation matrices can be created at CORR<GO>
16. The Commodities in this section are taken from the Bloomberg’s new BCOM Index, part of the Bloomberg Commodity Index Family, formerly known as the
DJ-UBS. With reference to the selection of the both the selection of the constituents and the calculation methodology, the design of the index embodies four
key principles: economic significance, diversification, continuity and liquidity. More information can be found at BCOM<GO>.
17. Use BT<GO> for the creation, backtesting and optimisation of strategies. It will integrate your own custom studies built in STDY<GO> and can also
generate alerts. A guide to BT<GO> as well as a forum can be found within red toolbar in the function.
OTHER RESOURCES
• CHART<GO> is the homepage for Bloomberg charts and technical analysis with links to a variety of functions and resources including documents on
Bloomberg’s own proprietary studies.
• ‘Getting Started With Bloomberg Charts’ at DOCS 2069346<GO> for an introduction to what is possible.
• ‘A Guide to Bloomberg Charts’ at DOCS 2065187<GO> for a more thorough walkthrough how to use our charting and technical analysis functionality.
DISCLAIMER - Read the full Bloomberg Tradebook disclaimer here: http://goo.gl/UewDb