We do things differently here, not just for the sake of being different but because we are driven to gain insights into market opportunities and risks that most investors miss. For this reason, we sound different to most other financial market research firms.
We know you must analyze data and behave differently if you want to earn superior, risk-adjusted returns. You cannot make decisions in the same fashion as everyone else and expect your investment performance to deviate from the average.
Because of our unique approach, you may initially find yourself confused or unclear and what exactly we are trying to convey to you.
Below we’ve provided an overview of the some of the most common words and phrases we use that are unique to us and the way we evaluate markets.
When we refer to the “Old Institution,” we are referring collectively to the majority of global financial (and financial-adjacent) institutions that still evaluate and discuss economies and financial markets in an outdated, dogmatic manner.
“Old Institution” includes but is not limited to: Wall Street firms, every central bank on Earth, organizations like the International Monetary Fund (IMF), foreign banks, traditional media, think tanks like the Organization for Economic Cooperation and Development (OECD), and anyone else exhibiting the characteristics outlined below.
These organizations’ motives (including self-interest and profit incentive) vary widely, but the way they evaluate and communicate about economies and markets very much overlaps:
1. They focus on either lagging data that is often significantly revised or on forecasts of what will happen six to twelve months away. These rearview mirror and forecast-oriented approaches mean they are always months late and a dollar (euro, yen, pound, loonie, real, etc.) short to shifts in Fundamental Gravities, as well as to bull-bear regime shifts in financial markets.
In contrast, we focus on better understanding what’s happening right now. This “Focus on Now” approach allows us to filter out the noise of backward-looking narratives and forecasts that are sure to be proven wrong. Our “Now” philosophy reduces the likelihood of missing even the slightest economic or financial market development, and it routinely positions us to be among the first to detect an economic or financial market regime shift.
2. They focus almost exclusively on the “levels” of this lagging and often heavily revised data, rather than on what really matters, which is the slope (rate of change) of the data. This “levels” preoccupation means they don’t see shifts in Fundamental Gravities until months after the fact.
By the time the data has deteriorated (or accelerated) to “levels” that send them a clear signal, asset classes have already responded to the new economic conditions. In short, by the time the Old Institution acknowledges the changed environment, the low-risk, high-reward trades are as dead as disco.
In contrast, we focus our attention on the slope, or the rate of change (ROC), across both economic and financial market data. As our CEO, Landon Whaley, likes to say, “What matters most in macro occurs at the margin.” The ROC gets you paid, while the “levels” get you left behind.
3. They depend on narrative rather than data. No matter what occurs across global economies or financial markets, these folks scramble to find the narrative that fits it best. This particular peccadillo isn’t just the domain of the media—every party included in our definition of the “Old Institution” is guilty of this one.
For example, in November 2018, Mario Draghi, president of the ECB, gave a speech in which he blamed everything from the weather to sickness for what he called a “soft patch” in the eurozone economy. His speech was delivered after nearly a year of slowing economic data across both core and periphery economies, with Germany, the largest eurozone economy, just one quarter away from a technical recession, and stock market crashes in multiple countries.
Rather than acknowledge the litany of data signaling much more than a “soft patch,” the head central banker clung to a narrative driven by inclement weather and disease.
In contrast, we depend steadfastly on data. We focus exclusively on the data and nothing but the data, rather than the narrative du jour being spun about it. Data doesn’t lie, but narratives do.
4. The Old Institution (and most investors) are prisoners of the moment and simply extrapolate the most recent events or trends across economies and global markets forever into the future.
For example, in July 2018, all three primary gauges of U.S. inflation (consumer, core and producer prices) had been accelerating for six to 24 months, depending on the gauge. Based on this most recent trend, the Old Institution and its followers were calling for inflation to ramp even higher for the remainder of 2018 and well into 2019. They simply looked at what inflation had been doing and extrapolated that trend forward.
In contrast, we take a Bayesian approach to evaluating markets, updating our view of each economy and asset class as each piece of data rolls in. We will never be perma-bullish or perma-bearish. We aren’t trying to drive trading activity, get clicks or attract advertisers. We are trying to get the big macro calls correct so you can position yourself accordingly, before the Old Institution and its devout followers figure out what’s happening.
In “The Playbook” from the July 16 edition of Gravitational Edge, we said, “Despite everyone’s belief that inflation is pulling a Superman and going up, up, and away, we believe inflation—along with growth—will begin to slow towards the end of 2018 and heading into 2019.”
Rather than use the highly scientific technique of straight-line extrapolation, we had evaluated U.S. inflation using our models, which take into account factors like the non-periodicity of economic cycles. We realized that inflation was likely to peak within two months and alerted our subscribers accordingly. All three gauges of U.S. inflation peaked in July and remained in a downtrend for the remainder of 2018.
This data-dependent, Bayesian approach of focusing on Now and on the slope of economic and financial market data is how we are able to consistently position ourselves before markets move.
In early 2018, we were one of the first firms to flag slowing economic growth in places like China, Germany, Brazil and South Korea and to discuss the impact this Fundamental Gravity shift would have on the equity markets in those economies. Our CEO, Landon Whaley, made these calls publicly before equities crashed in China, Germany, Brazil and South Korea and months before these developments were headline news.
This approach is also how we anticipated and positioned correctly for the U.S. market carnage of Q4 2018. We alerted our research clients the week of September 24 (we are happy to provide that week’s reports to anyone who asks; simply drop us a line) and were positioned correctly heading into October’s “sea of red”.
Once again, Landon made this view public on October 9, 2018, calling for a decline in both U.S. tech and consumer discretionary stocks. Over the next 14 trading days, the Technology Select Sector SPDR ETF (XLK) declined -10.6% and the Consumer Discretionary Select Sector SPDR ETF (XLY) declined -11.1%.
If you want to be a consistently successful investor, you must forget what you’ve always been told by the “Old Institution” and embrace a new way of analyzing economic and financial market data.
Take control of your investing by remaining data dependent, process driven and risk conscious so you can routinely sidestep dangers most investors never see coming and position for opportunities most investors miss.
One of our three Core Principles is that we channel our inner Eckhart Tolle and focus on better understanding what’s happening right now.
In contrast, most investors spend their time focused on what’s already happened and on economic data that is months old, or focused on forecasts three months in the future, or further.
Using old data to make decisions today is as risky to your portfolio as driving while only looking in the rear-view mirror.
As for forecasts, let’s take our cue from meteorology. With all the technology available, weather can’t be accurately predicted beyond 72 hours, and some would say getting it right today is a stretch. If this is true, why would we think that anyone can accurately predict something as complex as the global economy three months into the future? The simple answer is that they can’t.
We certainly keep an eye on what’s already occurred, and pay sharp attention to potential future developments. However, our experience tells us that by understanding what’s happening right now, we can gain insights most investors miss.
In order to be a successful investor, it is imperative to remain data dependent. Being data dependent means that data alone drives your decisions, not the narratives that people spin about the data.
The second of our three Core Principles is that our research focuses on what’s happening at the margin of economic and financial market data.
In contrast, most investors rely on media headlines or the top line economic data point to inform their decisions.
The trend, or the slope, of the data is what matters most, not a single data point.
When we evaluate economic data, we focus exclusively on the slope of the annual growth rate of that data series. This is an important distinction because most economic data is not analyzed in these “year-over-year” terms.
Focusing on the slope of the annual growth rate allows us to decipher the signal, rather than being bombarded with the noise inherent in the monthly or quarterly growth rates.
Our third Core Principle dictates that we focus on understanding not just the slope of economic and financial market data, but also the extremes.
In contrast, most investors focus on averages. With economic data, they focus on how the data performed versus the “consensus expectation,” which is the average opinion of a group of economists. When it comes to financial markets, they focus on average returns and moving averages to help guide their decisions.
We say that averages don’t provide any significant guidance. Instead, we monitor the trend of economic and financial market data to alert us to extreme measures of fundamental, quantitative and behavioral factors.
We study the extremes in markets for the same reason biologists study disease to better understand the healthy body, or meteorologists study hurricanes to better understand everyday, local weather.
When analyzing economies and markets, it’s understanding the abnormal and irregular—the extremes—that provides the greatest insight into risks and opportunities.
When we refer to investors’ “humanness,” we mean all their biases and their predilection to let emotions rule over sound judgment.
Human beings are innately flawed decision makers, especially when it comes to making financial decisions. We are hardwired to do exactly the wrong thing at exactly the wrong time.
This is why understanding the behavioral aspects of financial markets is just as important as the fundamental and quantitative. Remember, markets are driven by human beings making human errors, which is what gives rise to risks and opportunities.
Nowhere is investors’ humanness more on display than when they attempt to evaluate the quantitative aspects of financial markets.
We instinctively obsess over the smooth and symmetric, which is why we look for patterns and symmetry everywhere. This subconscious obsession forces us to impose patterns where none exist, and to deny patterns if they don’t conform to our perspective.
Our DNA is why “technical analysis” is fool’s gold. Investors identify various chart pattern formations or “support” and “resistance” levels simply by eyeballing a chart. Most people don’t understand that chance alone creates false patterns and cycles that appear to be predictive, when in fact they are not.
They also evaluate markets using traditional quantitative methods built on the belief that markets are linear and rational. But in reality, financial markets are a nonlinear, turbulent system produced by the interaction of human beings—in short, chaotic. This makes traditional methods ineffective and misleading.
Understanding the “humanness” of investors allows us to gauge perceptions, reactions and decisions across time, gaining valuable insight into others’ behaviors.
Our insight is distilled from our proprietary Gravitational Framework, which helps us better understand the three most critical forces, or gravities, that impact asset prices: Fundamental, Quantitative and Behavioral. To develop a full understanding of our Gravitational Framework and its unique capabilities to drive asset management decisions, please CLICK HERE.
The first dimension of market structure is the energy, or trend of the market. For this analysis we use SOCIAL to determine the current state of the market. Remember, 75% of price movement occurs only 10% of the time; the rest is just noise. Markets move from one state of rest to another, and then those rest periods are disrupted by investors who believe the market in question is priced either too high or too low. SOCIAL helps us identify when the market is in one of four states: party (bullish), hangover (bearish), taking a breather from the current trend, or completely asleep.
The second dimension of market structure we monitor is the force, or momentum of the market. For this analysis we use MOMO, which gives a clear measure of the force behind the current state of the market, which is identified using SOCIAL. More importantly, MOMO tells us how that force is shifting over time.
The third dimension of market structure is the rate of force, or the buying (selling) pressure associated with the current momentum of the market. For this analysis we use BAROMETRIC, which gives us immensely more information about investors’ degree of conviction than a simple measure of volume alone.
Finally, the fourth dimension of market structure is the drawdown risk embedded in the market. For this analysis we use TOPO, our proprietary measure of a market’s irregularity. Drawdown risk is an often-overlooked aspect of markets until a sell-off occurs. However, it's a primary factor of the underlying market structure and a critical driver of price.
We’ve named the market timing part of our investment process “The Mongoose” because the market behaves like a cobra, and in order to consistently and repeatedly be successful, we must trade like its opposition: a mongoose.
The mongoose provokes the cobra to attack, then rapidly dodges and follows up with another distracting motion. It tirelessly darts and nips, completely focused on its opponent. Finally, precisely when the cobra is fully extended and about to strike, the mongoose clinches the attack with a deadly bite.
We let the market make its repeated strikes, moving from price to price. When it’s at last over-extended and at a point of exhaustion (to the upside or the downside) like the cobra, we position ourselves opportunistically for the market to reverse course, thus clinching the attack, like the mongoose.
Wildlife aside, we generate our specific Mongoose-like market timing signals using algorithms based on Chaos Theory and fractal geometry, and we are one of the few firms I know of that do so. In contrast, most investors, professional or otherwise, attempt to evaluate the quantitative aspects of markets using tools built on the belief that markets are linear and rational.
But in fact, financial markets behave more like weather; they are a nonlinear and turbulent system, which means traditional quantitative methods and indicators are not only ineffective but also misleading. Chaos Theory and fractal geometry-based algorithms provide better insights into the underlying market structure that can’t be seen on a price chart.
ALPINE AND ABYSS LINES
Our proprietary ALPINE and ABYSS lines are not “support” and “resistance.” Rather, they are the price areas above and below the most recent closing price where price is likely to stall, experience an acceleration in its current trajectory, or possibly reverse its current course. As with The Mongoose, we calculate these critical prices utilizing fractal geometry and Chaos Theory, which means these Alpine and Abyss lines take into account the nonlinear reality of financial markets.
An Alpine area above the current price is where it’s highly likely that any upside price momentum will stall and possibly pull back lower. However, if the market (or stock) closes decisively above that area, price is likely to accelerate higher from there.
On the flipside, an Abyss area below the current price is where it’s highly likely that any downside price momentum will stall and possibly bounce higher. Here again, if the market manages to close decisively below that area, price is likely to accelerate lower from there.
The importance of the Alpine and Abyss lines cannot be overstated, because: 1. They help us identify price levels where price is likely to behave in a predictable manner, and 2. No one else has them. These two facts give us a distinct advantage over other investors, and combining the A-A lines with our Gravitational Framework and The Mongoose heavily skews the odds of trading success in our favor.
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