On Market Timing: The Pareto Distribution Edition
January 26, 2014 Leave a comment
There’s a certain elusive macro market participant on twitter (self described “heavy hitter”) who seems to demonstrate a repeatible, winning posture and process. I don’t know what to make of him, but I remain in awe of his apparent talent (he’s also quite entertaining). Take for example, his ‘auspicious’ return earlier this week, on January 21st, 2014 1:42 AM EST. Consider what has happened in the markets within days of his return:
- Statistically significant currency volatility.
- Equity volatility.
- And more volatility.
How does he do it? Maybe his back starts to ache, and that’s all he needs to know. Maybe I’m superstitious, and I see patterns that simply aren’t there. But I’ve observed him making one too many good calls/bets (when he was on twitter more regularly), way ahead of the curve (a trend-maker, not a trend-follower):
- Well-timed Long European Sovereign Debt.
- Short gold posture and positions.
- Various USD JPY trades.
- Long natural gas.
- Short Apple at its peak.
- I’m told: “AUD short from 2012/13. That was the largest.”
He’s had his share of mistakes (his biggest mistake is probably fairly consistent bearish stance towards US equity indices, after 2011), but without knowing position sizing, etc. it’s unclear how material these mistakes have been on performance. Also, the mistakes reduce (but doesn’t eliminate) the likelihood he’s a fraud. Bottom-line, I remain in awe.
“Alas, the assumption is false and so the math is wrong. Financial prices certainly jump, skip, and leap—up and down. In fact, I contend the capacity for jumps, or discontinuity, is the principal conceptual difference between economics and classical physics.” - The Misbehavior of Markets, by Benoit Mandelbrot (may he rest in peace)
Question: is market timing possible? can you ‘know’? It seems that all the gifted market timers say ‘no it is not’… yet they manage to get the timing right more so than not, and (most importantly) get the timing right when it actually matters.
“My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, At least half of this is bull. I mean, you know the reason he changes his position on the market or whatever is because his back starts killing him. He literally goes into a spasm, and it’s this early warning sign.”
