Archive for September, 2010

Do Fund Flows Predict Future Stock Market Movement?

Thursday, September 30th, 2010

NO!

I suppose I could leave it at that, but perhaps a little explanation is warranted.

There was an article on Business Insider today that told of a formula for market success. It was based on “following” mutual fund flows. When fund flows are positive, go long a broad-based market index, such as SPY. When fund flows are negative, go short the SPY.

If that sounds familiar, it should. Almost one year to the day, I wrote about the same thing! Here’s a link to the post titled Busting Yet Another Market Myth.

There were actually two parts to last year’s post. One part dealt with what happened to the stock market after the broad-based indexes rose more than a given percentage above their long-term moving averages. The second part dealt with what happened to the stock market after mutual fund flows of stock funds were positive or negative.

I showed that from the period beginning in 2007, a terrific strategy would have been to do the non-contrarian thing and follow fund flows. In other words, the conclusion the Business Insider contributor reached was correct based on the data period analyzed.

IMAGE saupload nnf1 large Do Fund Flows Predict Future Stock Market Movement?

Importantly, I also showed that had you selected a different time period, the results would have shown the exact opposite! In other words, following fund flows would have proven to be disastrous. You would have completely missed out on a huge market rally.

IMAGE saupload nnf2 large Do Fund Flows Predict Future Stock Market Movement?

What’s more, in my analysis, I did not go short when fund flows were negative as the Business Insider article suggested. Had you also gone short when flows were negative from 1984 to 1990, would have been catastrophically wiped out!

Bottom line, there is no evidence that, when measured over an extended time period, mutual fund flows predict gains and losses.

– Don

Posted in Market Updates, Proprietary Research | 1 Comment »

Growth Is Good! We’re Hiring!!

Tuesday, September 21st, 2010

The type of growth we’ve been experiencing the past year and a half continues.  That means we need help, and that means we’re ready to do something that we do very rarely.  We’re hiring!

We’ve launched and updated several new products in the past 20 months, and we have several more new products and major upgrades in the pipeline.  The backlog is starting to pile up.  We need help to stay on schedule.  And I need some relief so I can get back to regular blogging.  I’ve got a lot to say on the subject of dividends, VIX futures, correlation, and a host of other subjects.  But I just don’t have the time to put together a post that meets my standards.

With that in mind, I’m looking for multi-talented individuals to help in several areas: web site development, social-network marketing, assistance in back-office management systems, and, of course, options market analysis.

I’ll add this.  I’m looking for passionate people who can take instructions and run with them–without supervision.  I have neither the time nor the stomach to be a baby sitter.  So if you are not a self starter, don’t fool yourself and think that you are now.  If you’re not fanatical about constantly learning and improving, if you’re not obsessive about the quality of even the most minor details, if deadlines are soft goals meant to be rearranged, if coming to work doesn’t get you excited, if your idea of hard work is a 9-to-5 thing, then don’t bother.  We will not get along.

But if your personal goal is to never stop learning, if finishing the job is more important than the time on the clock, if you find hard work rewarding, if completing projects accurately and on time gives you satisfaction, then we’ve got the type of environment you’re looking for.

Your workplace will be in Lexington.  I want to work with you personally, not long distance.

If you’re interested, feel free to send a résumé, and a cover letter telling me how you can help my company grow.  I expect the letter to be flawless!  It’s what I’ll read first, and if it isn’t good, I won’t even read the résumé.

FYI, we use the following software:  Debian Linux, Apache, php, MySQL, Perl, Java, Dreamweaver, Flash, Excel, Word, and some standardized multimedia software.  The more experience you have with what we use, the better.

Finally, for those of you who may be wondering, the chosen candidates will be taught our investment methodology.  So a desire to learn about the financial markets is a must.  A non-compete/non-disclosure will be required.

Send your information to careers@donfishback.com or to the following mailing address:

Fishback Management and Research, Inc. – Careers
1040 Monarch St., Suite 110
Lexington, KY 40513

– Don

Posted in Miscellaneous | No Comments »

What Will VIX Do on the First Friday of September?

Thursday, September 2nd, 2010

Interesting article on Bloomberg regarding the future direction of VIX, and its reaction to tomorrow’s employment report.  In the article, MKM Partners expects VIX to drop below 20.

The article doesn’t say whether the options strategist at MKM expects VIX to drop below 20 tomorrow.  More important, what the article did do was give me an opening to discuss one of the analytical tools that we developed here at FMR — the ODDS Volatility Map!

What this “map” does is graph the percent change in the S&P 500 compared to the percentage point change in VXO.  [I chose VXO instead of VIX to get the additional history that VXO has.  Plus I like the thought of isolating this to just the at-the-money options instead of the broad spectrum of strikes.]

The beauty of the map is that you can isolate it by month of the year, by day of the month and/or by day of the week.  In this particular sample, I isolated it to the first Friday in September — the day the government comes out with the payroll data.

IMAGE VIXMAP1 What Will VIX Do on the First Friday of September?

Let’s take a look at one of the data points to make sure you understand what it means.  In the lower right corner is a data point with an x value of about 3% and a y value of about -4%.  That’s from the first Friday in September 1999, when the S&P 500 was up 2.99% and the VXO fell from 25.44 to 21.39, a drop of -4.05 percentage point.

Do that for each of the first Fridays in September since 1986 and you get the data points.  Do a linear regression, and you get the trendline.  That trendline provides an idea of what kind of move in the stock market it would take in order for the VIX to drop below 20 tomorrow.  Basically, 75% of the move in index implied volatility on the first Friday in September is determined by the action in the S&P 500.  Also, if the stock market does nothing tomorrow, the index is likely to drop about -0.46.

Of course it’s not perfect.  The trendline doesn’t perfectly tell us what will happen.  But it does provide a pretty interesting map of what to expect with VIX and VXO given certain market reactions.

What’s interesting to note is that on all other Fridays in September, you don’t have that negative y-intercept.  That is, for all Fridays that are not the first Friday in September, you tend to not have that volatility fade going into the weekend.  But you can also see that the correlations tend to break down, falling from 75% to just 47%.

IMAGE VIXMAP2 What Will VIX Do on the First Friday of September?

– Don

Posted in Magnitude, Market Updates, Options, Probability, Proprietary Research, Volatility | 2 Comments »