Monday, August 8, 2011

Number crunching vs. Fundamental Events

I have an algorithm that suggested bearish near term future for the VIX last week, and... the S&P lowered US credit rating on Saturday. Intuitively, volatility is expected to rise for a while. How long til the dust settles? That is probably the answer everyone's looking for.

So this brings up a very important idea, that math alone isn't enough to squeeze a profit out of the markets consistently over time. While the numbers show that DOW is undervalued with respect to its yield vs treasury bonds, it still does not mean a rally in the next week is likely considering the increasingly alarming US federal and municipal credit concerns.

Today, I can genuinely appreciate how hedge funds like Ray Dalio's Bridgewater operate, making precision decisions off macro economics, likelihood of future crowd behavior. Sometimes it requires both quantitative and qualitative methods for more robust decisions.

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