Alex Spiroglou, DipTA (ATAA) ECF Securities Derivatives Dept
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Alex Spiroglou, DipTA (ATAA)ECF SecuritiesDerivatives Dept
Speaker BackgroundMr Spiroglou is working in the Derivatives Dept of Energon Capital Finance.Performing Advisory Derivatives Portfolio Management for a private client base,and also produces the “Daily Market Strategies” report , covering the commodities, equity, currency and fixed income markets based on quantitative, intermarket and technical criteria.He holds a Bsc in “Banking and International Finance” from City Univercity, LondonHe also has the following professional qualification titles :- Investment Management Certificate (U.K. Society of Investment Professionals)- Diploma in Technical Analysis (Australian Technical Analysts Association)- Market Maker Certificate (ADEX)- Client Consultant Certificate (ADEX)- Investment Consultant Certificate (HCMC)
If you interested in the Notes accompanying this Presentation , feel free to email me at : [email protected]
q PART I ………….……………………………..…..2
- Introduction
- The Necessity for Intermarket Analysis
- Basic Principles
- Asset Allocation & Market Timing Uses
q PART II ………….……………………………..…..17
- Comparison to Technical & Fundamental Analysis
- Limitations of Intermarket Research
q PART III ………….…………………………….…..25
- Systemizing Intermarket Analysis
- Mechanical Trading
- SemiMechanical Trading
� What is Intermarket Analysis ?
� What is the Markets’ Message ?
� Is it just another Theory ?
� Think like a Fundamentalist , Trade like a Tehnician
PART I (Introduction)
The Assumptions behind Intermarket Analysis
� All markets are interrelated, they don’t move in isolation.
� Intermaket work provides background data.
� Intermarket work uses external , as opposed to internal data.
� Heavy emphasis is placed on the futures market
PART I (Basic Principles)
PART I (Basic Principles)
Relationships Framework
1. Commodity prices and bond prices usually trend in the opposite direction. (Commodity prices and bond yields usually trend in the same direction.) 2. Bonds and stocks move together (unless in deflation)3. Bonds lead the stock market at the turns4. The dollar and commodities move inversely (particularly gold).5. A rising dollar is normally good for U.S. stocks and bonds because it is noninflationary.6. Gold leads turns in the CRB at the turns
Equally Important :7. Relationships between various futures markets and related stock groups (e.g. COMEX Gold & gold mining shares)8. The relationship between the CRB Index and the various commodity groups 9. Action between related commodity groups (precious metals and energy markets)1O. Action within commodity groups (gold to platinum, crude and heating oil)11. Action between currency pairs
PART I (Basic Principles)The line along the bottom shows the positive correlation between
T-bond prices and the S&P 500
PART I ( Asset Allocation & Market Timing Uses)
Market Timing
Leading Market Relationships“Leading” markets, could pinpoint potential trading
opportunities, as they are about to unfold-“Leading” markets could help identify trends so traders could catch a bigger portion of each move
Coincident Market Relationships-False signals could be minimized because the full picture is taken into consideration, not just a small piece of it-Stops could be placed on how related markets are affecting the market being traded.-Divergences between correlated markets can help spot short / medium / long term price disclocations.
PART I ( Asset Allocation & Market Timing Uses)
What other Strategies can be devised and Opportunities exploited ?
Ø Intermarket Spreads
Ø Intramarket Spreads
Ø Pairs Trading
PART II (Comparison to Single Market TA )
Single Market Technical analysis (on its own) is incomplete , as an exclusive technical focus is counter-productive. Reliance on price based indicators (solely) may limit our understanding of what drives the markets. In other words, by obsessing about price, we might be sacrificing deeper insight into the root causes of price behaviour.Intermarket Analysis - by turning the focus of the technical analyst outward instead of inward- provides a more rational understanding of technical forces at work in the marketplace. It is impossible to do intermarket work without understanding of the fundamental forces behind those moves.
By incorporating “exogenous” factors – say interest rates – we add a helpful causative dimension to our treatment.This way the timing logic takes into account not only price action – which can be deceptive – but some of the defining properties that help shape and determine price behaviour
PART II (Comparison to Fundamental Analysis )
� Transferable
� Global , not Local
� Market Driven
� Focal Points
PART II (Comparison to Fundamental Analysis )EXAMPLES
(E715)
Monthly Data 12/31/1974 - 2/28/2005
Consumer Price IndexYear-to-Year Change
2/28/2005 = 3.0% Scale Left
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1011121314
Commodity Basket (DJ & CRB
Commodity Indices)2/28/2005 = 461.9
Scale Right
240260280300320340360380400420440
Commodity BasketYear-to-Year Change
2/28/2005 = 9.7% Scale Left
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Inflation vs Commodity Prices
PPI / CPI & CRB Index
PART III ( Systemizing Intermarket Analysis )
� We have no choice
� Structure , Discipline & Risk Values
� Markets provide enormous amounts of information
� Our Competitors do it…
Why Systemize ?
PART III ( Systemizing Intermarket Analysis )
� Can be…
� Can be classified as…
� Can be used as…
� Can be used in…
Market Correlations…
PART III ( Systemizing Intermarket Analysis )
Mechanical Trading Discretionary Trading
Semi- Mechanical Trading
PART III ( Systemizing Intermarket Analysis )
What is Mechanical Trading
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PART III ( Systemizing Intermarket Analysis )
Why not go completely Mechanical ?
� Not everything can be modelled
� Experience cannot be “pigeon-holed”
� No (modelled) Strategy works across all time frames
� Systems are often over-optimised
PART III ( Systemizing Intermarket Analysis )
Semi – Mechanical Trading
The essence of the Semi-Mechanical Trading approach is not to “forecast” & predict the
future (unlike discretionary trading), but to objectively identify substantially different
average return / risk characteristics of the present.
Mechanical Entry / Exit Rules (signals) can be overiden and are usually combined with the
underlying technical picture in order to align our investment position with the specific
market characteristis that we identify at any given point in time.
Objective Models / Ranking Systems are devised (providing weight of the evidence) in
order to facilitate a disciplined yet flexible decision – making process.
PART III ( Systemizing Intermarket Analysis )Examples
ISM & the S&P 500
(S1100)
Monthly Data 7/31/1950 - 2/28/2005 (Log Scale)
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Signals Generated When ISM Index:Declines by 7 Points = BuyRises by 22 Points = Sell
Profitable Trades: 78%Gain/Annum: 9.7%Buy-Hold Gain/Annum: 8.0%Latest Signal 7/31/2004 = 1101.72
1318233040526990
118155203267350459602790
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1318233040526990
118155203267350459602790
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Declining = Bullish
Rising =Bearish
333639424548525660657075818794
333639424548525660657075818794
Standard & Poor's 500 Stock Index
Source: Institute for Supply ManagementISM Report on BusinessInstitute for Supply Management Price Index
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PART III ( Systemizing Intermarket Analysis )Examples
ISM & BondsMonthly Data 1/31/1980 - 2/28/2005 (Log Scale)
(B0615)
Standard & Poor's Long-Term Government Bond Index
S&P L-T Gov't Bond Index Gain/Annum When:
PMI Point Gain/ %Change Is: Annum of Time
Above 3.4 -4.2 36.2
Between -3.5 and 3.4 3.8 29.2
* -3.5 and Below 8.5 34.6646975818895
102111120129140151
646975818895
102111120129140151
Institute for Supply Management Index (PMI)
Shaded areas representNational Bureau of
Economic Research recessions.Source:Institute for Supply Management,
ISM Report on Business
2/28/2005 = 55.3
Manufacturing Expanding
Manufacturing Contracting
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Manufacturing Conditions Improving
Manufacturing Conditions Weakening
2/28/2005 = -6.8PMI 12-Month Point Change
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ISM PMI Index (12-Month Point Change)
PART III ( Systemizing Intermarket Analysis )Examples
Bonds & Commodities
(B0775)
Daily Data 8/29/1979 - 3/28/2005 (Log Scale)
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Treasury Bond Futures (Perpetual Contract)
Profitable Trades: 64%Gain/Annum: 10.4%Buy-Hold Gain/Annum: 1.5%Latest Signal 1/24/2005 = 114.34
Signals require confirmation from two of the three indicators belowSource: Commodity System, Inc. (CSI)
www.csidata.com44485257636975839199
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44485257636975839199
109119130
Commodity Research Bureau'sFutures Price Index
Index rises by 6.5% = sell bondsIndex falls by 6.8% = buy bonds
Next Buy at 300.50
191206222240259280302326
191206222240259280302326
Commodity Research Bureau'sSpot Raw Industrials Price Index
Index rises by 2.2% = sell bondsIndex falls by 1.7% = buy bonds
Next Buy at 329.92219234250267285304325347
219234250267285304325347
Goldman Sachs Commodity IndexIndex rises by 9.3% = sell bondsIndex falls by 7.9% = buy bonds
Next Buy at 354.96
Source: Goldman Sachs Commodity Index (GSCI) R133153176203234269310358
133153176203234269310358
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Three Commodity Indexes -- Signal Basis
PART III ( Systemizing Intermarket Analysis )Examples
S&P 500 & CommoditiesWeekly Data 1/19/1968 - 3/24/2005 (Log Scale)
(S970)
DJIA Gain/Annum When:
CRB Index Smoothed Gain/ %Y/Y Percent Change Annum of Time
* Above 108.2 -2.1 31.2
Between 96 & 108.2 7.5 38.4
96 and Below 16.1 30.4
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High Inflationary Pressures -- Bearish
Low Inflationary PressuresBullish
Three-Week Moving Average3/24/2005 = 113.0
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Commodity Research Bureau Futures Price Index (Year-to-Year Change)
Dow Jones Industrial Average
Concluding Remarks
“Although the scope of intemarket analysis is broad, forcing us to stretch our
imaginations and expand our vision, the potential benefit is well worth the
extra effort. I am excited about the prospects of intermarket analysis …. The
question is no longer whether or not we should take intermarket comparisons
into consideration, but rather how soon we should begin..”
John J. Murphy
Market Correlations…
NOTES
This presentation is largely informational and by no means exhaustive.
More advanced strategies (that have been developed based on the ideas pioneered by
Mr Murphy ) have not been presented as they are :
(i) beyond the scope of the presentation
(ii) are proprietary
Charts : Some charts are courtesy of Ned Davis Research
Commentary : parts of the presentation include excerpts of Mr. Murphy’s books
REFERENCES & RECOMMENDED READING
John J. Murphy “ Intermarket Technical Analysis ”
John J. Murphy “ Intermarket Analysis, Profiting from Global Market Relationships ”
Martin Pring “ The All –Season Investor ”
Murray Ruggiero “ Cybernetic Trading Strategies ”
Mark Boucher “ The Hedge Fund Edge ”
Ned Davis “ Being Right or Making Money”
Ned Davis “The Triumph of Contrarian Investing”
Geoffrey Moore “Leading Indicators for the 1990’s”
Stephen Leeb “ Market Timing for the Nineties ”
Marty Zweig “Winning on Wall Street ”
Timothy Hays : “ The Research Driven Investor “
George Dagnino “ Profiting in Bull or Bear Markets “