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Wong, MAC, and those incredibly stylish posts the TA guys make...

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June 23, 2009 – Comments (12)

I read the paper on Moving Average Crossover by Wong this evening.  I must be honest and say that I read it nearly drunk with fatigue, as for 2 nights in a row the smoke detectors in my place have been going wild every 15 minutes, which makes it a bit of a challenge to get some rest.  It just occured to me to disconnect them all, which can be taken as proof of some kind of significant mental illness, I'm getting that check tomorrow.

But anyway, back to Wong, I am impressed.  His presentation is statistical in nature, clinical, no claims of clairvoiance or anything silly, just some historical facts.  Assuming his calculations are correct, it looks like we may have a time tested proven winning tool to go along with the similarly cold, clinical p/e, p/b, p/s, p/yield presentation of Dreman and others.

I like cold and clinical...  

Thanks to Tasty or Vibe or whichever one of you folks posted that in response to a post of mine in the "ego" thread.

And, lest I forget, I would like to say that I'm envious of the incredibly stylish posts youguys make.  I can't even embed a youtube video, and the last time i tried i dropped my laptop and broke the modem.  nice work.

To clarify what we are looking at here, we're looking at a 5 day centered moving average, which is basically just a smoothed curve of a stock or an index itself, and comparing that with a moving average thats offset as is the traditional rpesentation.  When the stock or index breaks north of the moving average, thats a bullish sign.

When it breaks south of the moving average, thats a bearish sign.  

 

Does one typically weight these crossovers according to direction?  Like the S&P breaking the 200 day MA when the 200DMA is falling is less impressive than if it breaks north of it when the 200 day MA is rising?

Or take a stock I have a small position in - LVS - its vastly off its early May highs and trending down.  Yesterday it went south through its 50 day MA and its always been below its 200 day MA in 2009.  

We'd take it as bullish for LVS if it bumped up past its 200 day MA??  Do we take it as bearish that it is now below its 50day ma?  

 

Whats the #1, Dreman-style (cold, clinical, statistics oriented) book on this stuff?  And whast the best website or software to use to tinker around with it?

 

12 Comments – Post Your Own

#1) On June 23, 2009 at 4:49 AM, PrestonCheek (31.67) wrote:

Checklist, sorry you broke your laptop.

The chart school at www.stockcharts.com has some good stuff about moving averages.

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#2) On June 23, 2009 at 9:19 AM, portefeuille (99.60) wrote:

You might also enjoy this paper by Wong: What the “Missing Out” Argument Misses (pdf) (from here).

Also see comments #1-10 here.

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#3) On June 23, 2009 at 2:06 PM, anchak (99.85) wrote:

Checklist....Hope you are not fatigued. First things first...try to acknowledge people by name - Tasty,GoodVibe,Anchak and Binve. I know possibly all that sleep depravation

Of these - I am the most confused and all-around "strategy" follower.( there's a reason why you are on my favorites list). I love Dreman BTW.

For software etc - Start with Stockcharts as Preston mentions. I personally use FreeStockCharts - but it can be a little too much at the beginning ( has a lot more tools)

As per books - honestly I could say you have a definitive one.

Let me tell you this: There is LITTLE KNOWN STATISTICAL evidence that TA works. But of course it is like saying  "Buy-and-Hold" works starting Nov 1987 and ending early 2000!

Nobody knows what really works - it is the evidence from the time period in consideration which defines the outcome in most cases.

Of course from a premise perspective - If you know the TRUE VALUE of an entity and you see it is at a huge discount and then you can find someone/a buyer - who also appreciates/values it in the same perspective - then you made a great deal. The missing piece here is a reasonable period of TIME. It took Van Gogh centuries to be appreciated - and it really did not do much to Van Gogh. Of course this is a little too abstract - with companies hopefully the discovery period should be small enough. The key issue there is of course survival - ie controlling risk/volatility ( This is the point of Wongs second link which Hans puts here) to weather things out.

 

However as Mr Wong shows ( also research Faber - I linked the paper at multiple places) - the MA crossover strategy has worked. This is simply based on the periodicity of markets and business/economic cycles. As long as a trend develops - and doesn't whipsaw - and keeps oscillating over period ....This will beat B&H ( Just index strategy mind you. Not a pick like LVS - Wax who runs the TMF Value board - agrees with me - LVS is not a good value play. You disagree - and seem to be winning this one).

So as it moves more and more towards specific stocks - one needs to be careful with TA ( The TA premise needs Law of Large numbers IMHO to fulfill).

But these days - simply given the fact there's a lot of people who use TA - simple concepts like Resistance and Support, SMA support (which you refer) - needs to be at least considered as a factor.

I did not put in a specific TA book - the ones I have read - are a little too complex ( written by people - who believe in it. Not a single one approaches it Dreman style unfortunately :( 

Use the net - you'll pretty much get the basic concepts. If you are interested - stop by and ask GV or someone - and we can share our favorite indicators  

I hope this helps.  

 

 

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#4) On June 23, 2009 at 2:18 PM, portefeuille (99.60) wrote:

I have posted a suggestion for a fit for the S&P index here (you should read my first comments #1-3 to that post first, because the post contains errors). That fit was inspired by the Wong paper, it is not closely related to this post here. Might still be interesting to see how a very simple function fits "quite nicely" (so I think ...).

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#5) On June 23, 2009 at 6:40 PM, checklist34 (99.72) wrote:

I can handle complex, but as a general rule I'd like to start with a foundation of Dreman-like simplicitiy.  Lordie but that Dreman foundation has served me well during this bear market, and as I add the complexities of stock picking around that clinical Dreman foundation, I both realize that there are other things to learn and also that it really can be that simple.

I don't want to be the human that gets beat by a rat (see my blog 1 below this and a back and forth with LongTermBull).

Thanks much Preston, porte, and Anchak for the suggestions, I passed out this afternoon at work and got a little sleep, so I may be alive enough to read them.  :)

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#6) On June 23, 2009 at 11:31 PM, checklist34 (99.72) wrote:

i read "what the missing out argument misses", thats a pretty nice commentary. 

Thats the key to all of this, honestly.  Don't be around when the big crashes happen.  

A strategy of just buying when the market crashes dramatically and everybody is talking doom and gloom and selling when it rebounds 50% or whatever would beat the tar out of buying and hold, at least if you rolled the money into treasuries or bank CDs once it was not in the market to make some return.

I need to revisit this... i posted about it once a while ago, and I really think it would be interesting to calculate returns based on buy/hold -vs- returns based on buying big crashes (pre-define some % crash, and some % rebound to sell at) and rolling it into interest-bearing investments in between.  Or just buying stocks when the market is below historical averages and selling them when it rises above.  Maybe buy when down more than 1 std deviation, sell when more than 1 std deviation too high.

There is a better way than buy and hold, ... there is a way to improve upon even the clinical stat-based returns of Dreman and the like.  

There is always a better way, but its critical, just critical to keep it clinical and statistical and NOT emotional or based on hunches or voodoo.  

What i'm saying, for those who have read Dreman, is that there is a greener "green room".  Just add an additional discipline beyond Dremans low p/e, low p/b, low p/s etc. thing.

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#7) On June 23, 2009 at 11:47 PM, portefeuille (99.60) wrote:

Glad you liked it, checklist34. Paragraphs that contain "what if you missed ... days" and that appear in the context of "investing" usually leave me shaking my head in disbelief (they are usually not even wrong, they just insinuate something very stupid ...).

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#8) On June 24, 2009 at 12:10 AM, portefeuille (99.60) wrote:

not even wrong

Actually I picked that phrase up from one of my mathematics professors and never really thought about it very much. I knew what he meant, but never looked it up. Well, I just did look it up and it I was surprised to see that it seems to go back to a certain person who introduced that phrase to the world. The meaning is just the one I had given to it.

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An apparently scientific argument is said to be not even wrong if it is based on assumptions that are known to be incorrect, or alternatively, theories which cannot possibly be falsified or used to predict anything.

Origins

The phrase was coined by the early quantum physicist Wolfgang Pauli, who was known for his colorful objections to incorrect or sloppy thinking. Peierls (1960) writes of Pauli, "... a friend showed him the paper of a young physicist which he suspected was not of great value but on which he wanted Pauli's views. Pauli remarked sadly, 'That's not right. It's not even wrong.' " In science and philosophy, it is known as the principle of falsifiability.

Basis

Statements which are "not even wrong" may be well-formed, but lack reference to anything physical (as in "Souls are immortal", because the noun "soul" is not well-defined in terms of experimental results), or may simply be gobbledygook which appears meaningless (as in some of the Time Cube writings). The phrase suggests that even a wrong argument would have been better.
The phrase "not even wrong" is often used to describe pseudoscience or bad science, and is considered derogatory.

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(from here)

 

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#9) On June 24, 2009 at 12:23 AM, checklist34 (99.72) wrote:

hey porte.  I like physics, I don't mean to boast, but since GMX has called me stupid a couple of times maybe its ok if I observe...

I am not a college graduate, and its not likely that i ever will be (formal education is officially out of date in this internet era where so much information is available that one can self-educate at a rate that dwarfs that of formal education), but I do have enough credits for a minor in math and physics.  And as a jr in college I got a better grade on the first test in the first year of quantum mechanics than my professor (who routinely took his own tests) and also was the only person (in 15 yrs) that ever got an "A" from one prof in some calc based stats class or other.  I drank alot in college, and smoked too much pot, so the details about the class are foggy.  Frankly, I think the condescening bears would be hard pressed to match those marks.  :)

But, that noted, I'm older now and my brain isn't what it used to be.  Such is time and age, alas.  Ahh to be 22 again.

But as is not infrequently the case, you make a nice point.  Its possible to make an argument, even one based on fact, that is beyond nonsensical.  

And its possible (this comment is possibly tangential to your point, but I offer it nonetheless) to rationalize your way into a really bad decision.  I accept that I'm not smart enough to avoid these traps, and as such I look for clinical statistical investment opportunities.  I doubt that i'll suffer for this in the long run.  

What country are you from, porte?

 

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#10) On June 24, 2009 at 9:47 AM, portefeuille (99.60) wrote:

What country are you from, porte?

From Germany. 

My 

Something more about "not even wrong", physics and stuff is in comment #63 here.

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A professor of mine who is a referee for some physics journals used to tell me that 90% of the papers submitted to those journals were "uninteresting". But the problem was that there were no mistakes in them. All the calculations were okay and the reasoning did not have any Siegel-like flaws but there was "not very much new" in them and the new stuff was usually, well, uninteresting. So he often could not reject the papers. They were simply "uninteresting".

I guess a physicist "that is any good" would never submit anything that is "blatantly flawed" but economists appear to have no problem submitting almost anything to the Wall Street Journal (I know that the WSJ is not a scientific journal but it is at least one of the best known newspapers).

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(more on the WSJ article by Siegel can be found in comment #5 here.) 

A comment on another comment of yours (see comment #11 here).

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I'm norwegian, an uncle spend 5 figures on the family geneology and history a few years back...  

Norway in ancient times was in ways the antithesis of the USA today.  You could take no wife nor know no woman if you couldn't afford the kids.  Their hwole moral code was about paying for yourself and your own.  Several of my greatXXX grandfathers were kings of norway including famous names like Harld the FairHair and whatever.  They had 10, 20 wives.  To the victor the spoils.  The winners get the girl, the house, whatever.

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A distant relative of mine is a French film director, Marcel Pagnol. What makes this interesting (for me) is that he wrote two books about his childhood memories in southern France and there are two films (1,2) by Yves Robert that are based on those books. Our common ancestors in Toledo (Spain). They later moved to the Provence (France) and my ancestors moved to Germany from there. I have suggested to celebrate the next family reunion in the village in the Provence that our common ancestors come from. So a longer answer to your question would be German with a Spanish, French influence ...

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Marcel Pagnol was born in Aubagne. His father, Joseph Pagnol, was a teacher, and his mother, Augustine Lansot, a seamstress. The family descended from Spanish swordsmiths who fled from Toledo during the Inquisition. When Pagnol was three, the family moved to Saint-Loup near Marseilles, where his father was appointed as a regular teacher at the school in the Chemin des Chartreux, the biggest elementary school in Marseilles. Pagnol learned to read at an early age, but until the age of six he was not allowed to open a book, "for fear of cerebral explosion," as his mother believed could happen. Pagnol wrote his first play for the local group when he was only 15.

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(from here)

 

 

 

 

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#11) On June 25, 2009 at 1:39 AM, portefeuille (99.60) wrote:

In that comment #34 I also mention (implicitly) that we (in Europe and North America) have entered in March the 10th year of the current bear market. There have been much longer ones (Japan is currently in the 20th year or so of theirs) of course ...

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#12) On June 25, 2009 at 1:40 AM, portefeuille (99.60) wrote:

sorry, wrong post ...

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