Random Friday: Timing China's Collapse, Backtesting, and Baseball

Why China's momentum is bound to end badly

Apr 17, 2015 at 8:39 AM
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It's Friday, and volatility is firmly on the "eh" part of the continuum. So how about a few random thoughts? But first … Star Wars!

Anyway … we're always on the lookout for counter-trend indicators. To me, the best sign a trend might continue occurs when there's evidence that the masses don't believe in the trend. Well, here's one that fits that mold via Bespoke:

"According to the weekly survey from the American Association of Individual Investors (AAII), bullish sentiment rose from 28.7% up to 32.07%. This is now the sixth straight week where bullish sentiment has been below the bull market average of 38.7%, which is the longest streak since last August."

I can certainly understand the "why" of this. We sputter every time we get around 210 on the SPDR S&P 500 ETF Trust (SPY), 5,000 on the Nasdaq Composite (COMP), et. al. But it does suggest there's fuel for a rally if relatively few expect said rally. I'll believe it when I see it, though.

There's certainly no lack of bullishness in China. It's tough to stand in the way of momentum, but if you're of the mind to try, it just got easier, as per Bloomberg:

"Futures on the small-cap CSI 500 Index started trading on Thursday, giving investors a cheaper way to wager on declines in shares valued at more than twice the level of the benchmark Shanghai Composite Index. The CSI 500 has surged 47 percent this year, versus a 26 percent gain for the Shanghai measure.

"The contracts, which come five years after China introduced futures on the large-cap CSI 300 Index, are part of the nation's efforts to allow more sophisticated trading strategies as policy makers open up the $7.1 trillion market to the rest of the world. Bocom International Holdings Co., China International Capital Corp. and Deutsche Bank AG say the new futures will probably weigh on smaller stocks as investors bet valuation premiums over larger companies will narrow."

We saw this movie here back in 1999. You know it will end badly at some point, but it's really tough to time bearish bets to play for the inevitable.

I'm always backtesting data for this space -- in fact, I did it as recently as yesterday. But there's a couple things I want to make clear: It is always for informational purposes. I don't now, nor did I ever, trade with some sort of strict system. I do occasionally go long at times of overbought CBOE Volatility Index (VIX), but it's always just one piece in a larger puzzle.

Also, I often run the data to disprove, or at least better examine, some lazy "systems" I read about or see on TV -- again, such as yesterday. Small sample sizes, magic ratios, inexact time frames, graphs that look good from 10,000 feet (but not so good when you squint a little) are all signs there's not much "there" there. I bring that up because here's a very good analysis of backtesting mistakes via Quantopian.

And finally, let's play ball! The following statements are all true:

  1. Major league baseball is strictly anti-gambling. They are fighting against legalization right here in New Jersey, in fact.

  2. Daily Fantasy Sports (DFS) games for money are legal because they are considered games of skill. But no one can say with a straight face that it's not de facto wagering.

  3. Major League Baseball (MLB) agrees that it's de facto wagering. They have officially banned players from playing DFS.

  4. DFS is growing exponentially. Everyone wants to invest, from hedge funds, to Walt Disney Co (NYSE:DIS), to … Major League Baseball.

So if it all seems inconsistent … well, of course, it's inconsistent. It's a complete joke that barely gets called out. But let's face it, the sports leagues aren't really anti-gambling. They're anti "someone else making money from it while we figure out how to best get our cut." They've all solved the DFS riddle with the tie-ins. They'll solve the straight-wagering riddle someday, too, and their tunes will magically change.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.



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