Peter Ciampi
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​​I'm a Private investor focused on closed-end fund events and statistical arbitrage of ETFs

Post 9.  Newtonian Physics applied to ETFs;       Momentum without Movement is Impossible

10/15/2017

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Newton’s first law of motion states: An object either remains at rest or continues to move at a constant velocity, unless acted upon by a force. It’s not unreasonable to take “continues to move …” as the basis for stock momentum models (See Post 4 for some discussion and a reference.) The recent stock market, however, has no constant velocity and so  “remains” at rest.” Neither North Korea, Iran, nor congressional gridlock has been a “force.”

This lack of stock movement astounds everyone. Last week Richard Thaler, winner of the 2017 Nobel Prize said: “We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping, I admit to not understanding it.”
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I’m more bored than you with the lack signals for the Buy-SPY-at-noon model but GDP-weighted momentum is a key factor so with the market at “rest” we’ve had no momentum. And we're really at rest. Two charts display it. The first is the widely reported VIX. The last point (10.7),  representing the average VIX for the last 3 months - the period since I started these posts - is the lowest 3 month period in five years. More dramatically, if the chart ran back 25 years it would still be the lowest period.
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Besides the general market (VIX) being at rest, my model's key input (morning change) is also at rest. The next chart plots this variable for US and European markets using ETFs. The end points, 2017Q3, show its dramatic plunge. During the first 18 quarters morning European volatility averaged .38 with a standard deviation of .07;  In quarter 2017Q2 it dropped to its then lowest point ever of .24 followed by Q3 when it plunged to .17 which is 3 standard deviations below its mean. There are two implications from this phenomenon: One is fewer signals as we've seen, eg., no signals since Sept 6th; the second, discussed in Post 7, is that profits and win ratios drop in low volatility periods so even when signals occur profits most likely will be small - until volatility picks up. But even though we're in a Newtonian "rest " period, I suggest you stay  with the system because a "force" will occur.

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VIX divided by 100 is the green line. Morning volatility follows VIX except for one US exceptions, 2017 Q1 and 2 large European exceptions 2013 Q1 and 2015 Q2.
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    May23 Return .31%


    Out-of-Sample return 62%








    Updated at 12 and 4:15pm on trade days

    Author

    Peter Ciampi is the Managing Director of CEF Events LTD, a British Virgin Islands business company and the Managing Partner of Time-Zone Arbitrage,a Delaware LP. Both companies invest in special situations of closed-end funds and statistical arbitrage of international ETFs.

@ 2017 Peter Ciampi
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