I came across an interesting article which talks about the 3 s.d( standard deviation or sigma) moves in financial markets. You know the kind of outlier events which are expected only to happen once in gosh..like 10 years, 15 years as per all the statistical models and supposedly the risk management we have built into our models should let us take corrective action on time. That the markets have tendency to revert to mean.. so actually you can bet against an abnormal movement..hope to revert it to mean and make some decent chunk of cash!! Nice strategy, only that these don’t work when you have an outlier event!!
Turns out these outlier events happen more frequently in financial markets then you are made to believe. Do you think the collapse of LTCM ( Long Term Capital Management) was a relatively isolated event? Well think again, it has been happening with amazing regularity. The top financial institutions like Citibank, Country Wide, Merry Lynch and who can forget Bear Stearns- writing of bad bets to the tune of billions of dollars!!These companies wiped out years of their profit in couple of quarters. Being a Mechanical engineer I have relied on 1 s.d , 2 s.d, 3.d even 6 s.d for years and these are pretty reliable indicators of quality control. It is just that when you apply the same thing to financial markets, it may not hold up….the investment managers have to be ready for any eventuality and playing defensively is the only way to survive these markets in the long term. My mantra..be ready for the outlier events and if possible profit from it..one of the reason I believe more in the trend following philosophy of the technical analysis of the markets then anything else.
Yes the markets have the tendency to revert to mean 99 out of 100 times, but when they don’t ..watch out for your head being handed in these markets. Wall street is littered with such carcasses, and yet we keep saying, hah it’s an outlier event..can’t worry much about it. Get real..get defensive..expect the unexpected..you survive! Otherwise you are another Citibank in the making!!

>I came across an interesting article which talks about the 3 s.d( standard deviation or sigma) moves in financial markets. You know the kind of outlier events which are expected only to happen once in gosh..like 10 years, 15 years as per all the statistical models and supposedly the risk management we have built into our models should let us take corrective action on time. That the markets have tendency to revert to mean.. so actually you can bet against an abnormal movement..hope to revert it to mean and make some decent chunk of cash!! Nice strategy, only that these don’t work when you have an outlier event!!
Turns out these outlier events happen more frequently in financial markets then you are made to believe. Do you think the collapse of LTCM ( Long Term Capital Management) was a relatively isolated event? Well think again, it has been happening with amazing regularity. The top financial institutions like Citibank, Country Wide, Merry Lynch and who can forget Bear Stearns- writing of bad bets to the tune of billions of dollars!!These companies wiped out years of their profit in couple of quarters. Being a Mechanical engineer I have relied on 1 s.d , 2 s.d, 3.d even 6 s.d for years and these are pretty reliable indicators of quality control. It is just that when you apply the same thing to financial markets, it may not hold up….the investment managers have to be ready for any eventuality and playing defensively is the only way to survive these markets in the long term. My mantra..be ready for the outlier events and if possible profit from it..one of the reason I believe more in the trend following philosophy of the technical analysis of the markets then anything else.
Yes the markets have the tendency to revert to mean 99 out of 100 times, but when they don’t ..watch out for your head being handed in these markets. Wall street is littered with such carcasses, and yet we keep saying, hah it’s an outlier event..can’t worry much about it. Get real..get defensive..expect the unexpected..you survive! Otherwise you are another Citibank in the making!!

I watched the breakout in gold above $700 per oz, oil above $80 per barrel and to a lesser extent silver above $13 an oz. Natural gas continues to languish at $6.00 to $6.50 level. I understand natural gas has a different dynamics compared to crude oil and there is enough of supply for North America and it can not be shipped to the rest of the world. That means the producer of natural gas( the commercials) are shorting the futures to hedge their production thus capping any rally in the commodity.

I also watched the plunge in 30 year bond on the day Fed announced its 50 basis point rate cut this past Tuesday. A steepening yield curve amongst other things, is a signal for inflation and is pointing to a continued strength in the commodities market. The plunge in USD index against major currencies also means the rally in commodities is going to continue for some time. Gold has seen many false breakout in the last two years, but this time it seems to be for real. I say this for so many reasons (I am a candidate for Chartered Market Technicians level II, a Technical Analysis is the first thing I am going to rely on )
1) The move is a slow creep upwards, these are indicative of strong trends compared to a parabolic move which can reverse in a hurry 2) Confirmation from breakout in crude oil and breakdown of USD. 3) Lowering of fed fund rate means injection of cash to the system which can keep the hedge fund commodity buying binge going for sometime. 4)Yen , the almost zero percent interest rate currency has been the worst performing currency for quite some time, means the carry trade in gold, silver, oil can continue for some time. A sudden strengthening of Yen in the global market can upset this fine balance and the carry trade can start to unwind impacting the commodities prices adversely.

Disclaimer- this post is not meant to be an advise for any one to get into these markets, a due diligence is always advised. The post is just some thoughts from the author who strongly thinks the yellow metal has broken out from its trading range above $700, only time can confirm it one way or another.

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I watched the breakout in gold above $700 per oz, oil above $80 per barrel and to a lesser extent silver above $13 an oz. Natural gas continues to languish at $6.00 to $6.50 level. I understand natural gas has a different dynamics compared to crude oil and there is enough of supply for North America and it can not be shipped to the rest of the world. That means the producer of natural gas( the commercials) are shorting the futures to hedge their production thus capping any rally in the commodity.

I also watched the plunge in 30 year bond on the day Fed announced its 50 basis point rate cut this past Tuesday. A steepening yield curve amongst other things, is a signal for inflation and is pointing to a continued strength in the commodities market. The plunge in USD index against major currencies also means the rally in commodities is going to continue for some time. Gold has seen many false breakout in the last two years, but this time it seems to be for real. I say this for so many reasons (I am a candidate for Chartered Market Technicians level II, a Technical Analysis is the first thing I am going to rely on )
1) The move is a slow creep upwards, these are indicative of strong trends compared to a parabolic move which can reverse in a hurry 2) Confirmation from breakout in crude oil and breakdown of USD. 3) Lowering of fed fund rate means injection of cash to the system which can keep the hedge fund commodity buying binge going for sometime. 4)Yen , the almost zero percent interest rate currency has been the worst performing currency for quite some time, means the carry trade in gold, silver, oil can continue for some time. A sudden strengthening of Yen in the global market can upset this fine balance and the carry trade can start to unwind impacting the commodities prices adversely.

Disclaimer- this post is not meant to be an advise for any one to get into these markets, a due diligence is always advised. The post is just some thoughts from the author who strongly thinks the yellow metal has broken out from its trading range above $700, only time can confirm it one way or another.