If it was once a fortnight, once a week or once a day, it would have been nice. But signals and signal generators have no religion. If you need a signal, the market has it; for any market, for anytime. And, if you are not going to sue (challenge) the signal, it could come stamped with 100 per cent accuracy.
Signals have become like a rubber band. You can stretch them for any time frame and from any side; long or short. But this creates conflict, on one side the society can generate so many signals, and on the other hand it barely outperforms the market. This is the reason passive indices claim, "What good is active anyway?" We live in the times of limited Alpha (risk adjusted return) but unlimited signals.
We punish politicians, punish insiders, punish scamsters, but how ethical are we 'the signal society' which seeks and delivers signals. "Please give us a signal, don't explain us cycles, history, perspectives, risk; just tell us what to do, buy or sell?" Now that the markets have moved sideways for years, how happy are we triggering?
Okay, what should the signal society do? What can it do better? Can we simplify? How can it bring objectivity? Apart from building signal systems that work across asset classes, signals that can be indexed, signals that also assume lower risk, we can relook at the whole signal generation process, the big picture view.
Since we are looking at the same elephant, the rubber band can be viewed differently. If the market is indeed a rubber band, speculators, investors and other market participants pull the band at extremes. The best performers see consistent interest as they move higher. While the worst performers continue to see continued selling pressure as speculators suppress price and investors exit, tired of waiting for a reversal.
The trigger happy society simply dumps the non-exciting losers. This is how extremes are created. The middle of the band consists of market indices, sector indices, and blue chips. The rubber band mean consists of components that are not easy to manipulate, not only because of their sheer size but also because of the way they are constructed, as averages.
After a point, the rubber band reaches a limit. The speculative pressure exhausts and the extreme ends reverse. The winners stagnate or fall while the losers consolidate and move up. The two ends of the rubber band are the points of largest recoil. The larger the recoil, the larger the price move. And larger the price move, the larger the price gain (loss). However, while the extremes revert with force, the averages and blue chips at the mean may simply go unchanged. We have illustrated this phenomenon on prior occasions, where we have shown how the best and worst can diverge more than 100 per cent from each other annually, while Nifty may sleep.
Behavioural finance and investment psychology tells us we don’t let our winners run. How can you let your holdings run a marathon, when you are trained for sprints? Eighty per cent of the investing community never makes money because of this holding period mismatch. Above this, the cocktail of leverage with signals is turning into a "Knightmare" (Knight Capital). The rubber band also explains market philosophy. The market has pulled the leverage to an extreme while ignoring spot (delivery) in dumps. The rubber band has coiled again. If the markets are punishing leverage and high frequency are they going to reward slow investing systems?
It's no surprise that intermediate multi-week signals have delivered better than active multi-day signals on the Sensex since 2006 (5 and 10 period average crossover). Okay! We can fit a better case favouring active versus passive. But I think you get my point. Life on the fast pace is exciting, but if the rubber band retorts and we have another 36 months of slow investing action, high frequency will fall on its knees.
The author is CMT, and Co-Founder, Orpheus CAPITALS, a global alternative research firm