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Factor

Factor Investing: An IntroductionThe concept of factor investing has garnered significant attention in recent years as an innovative approach to portfolio management. The idea behind factor investing is that it seeks to uncover the primary sources of return in investment portfolios, and to explicitly target these sources, known as factors. By systematically identifying and targeting these factors, investors can achieve improved portfolio diversification, risk management, and potentially, enhanced returns. Factor investing can be traced back to the Capital Asset Pricing Model (CAPM) introduced by Sharpe (1964) and Lintner (1965). The CAPM was a groundbreaking theory that posited that a security's expected return is directly related to its level of systematic risk, measured by the beta coefficient. The concept of beta provided an early example of a factor in investing. In recent years, factor investing has evolved and expanded considerably. Researchers and investment managers have identified numerous factors that drive investment performance, such as quality, low volatility, and liquidity. Primary Factors in Investing Market : The market factor represents the overall market return and is the core factor that drives investment performance. The market factor, or beta, is the exposure of an asset to the general movement of the market. Size : Size is the factor that focuses on the market capitalization of companies. Small-cap stocks typically offer higher potential returns than large-cap stocks, although they also tend to exhibit higher volatility. Value : Value investing targets stocks that are considered undervalued relative to their intrinsic value. Value stocks generally have low price-to-earnings, price-to-book, and price-to-cash-flow ratios, and they tend to outperform growth stocks over time. Momentum : The momentum factor captures the tendency of stocks that have recently outperformed to continue to do so. Momentum investing strategies aim to capture this trend by buying recent winners and selling recent losers. Quality : Quality is a factor that focuses on financially stable and well-managed companies. Quality stocks typically have high profitability, low leverage, and stable earnings growth. Low Volatility : Low volatility investing aims to identify stocks that have exhibited low price volatility over time. Low-volatility stocks often deliver better risk-adjusted returns than high-volatility stocks Benefits of Factor Investing Factor investing offers several benefits to investors, such as: Improved diversification : By targeting specific factors, investors can diversify their portfolios across various sources of return and risk, thereby reducing overall portfolio risk. Enhanced risk management : Factor investing enables investors to better understand the underlying risks in their portfolios and to manage those risks more effectively. Potential for outperformance : By systematically targeting well-established and robust factors, investors may achieve higher returns than traditional market-cap-weighted indexes. Cost efficiency : Factor investing strategies are often implemented using rules-based approaches, such as smart-beta or quantitative strategies, which can be more cost-effective than traditional active management. Transparency : Factor investing strategies are typically more transparent than traditional active management, as they rely on well-defined, rules-based methodologies that are easier for investors to understand and monitor. Potential Risks of Factor Investing While factor investing offers many benefits, it is important to be aware of the potential risks associated with this approach: Factor timing : Just like market timing, attempting to time factor exposures can be difficult and often leads to underperformance. Investors should be cautious about trying to predict when a particular factor will outperform or underperform. Overfitting : The process of identifying factors can be susceptible to overfitting, where a model is tailored too closely to historical data and may not perform well in the future. Crowding : As more investors adopt factor investing strategies, the potential for crowding in certain factors may increase, leading to diminishing returns or increased risk. Model risk : The effectiveness of factor investing strategies relies on the accuracy and stability of the underlying factor models. If the models are not robust or if they become less effective over time, the strategy's performance may suffer. Diversification risk : While targeting specific factors can help diversify a portfolio, it may also expose investors to concentrated risk if those factors underperform or experience periods of heightened volatility. Factor investing has revolutionized the way investors approach portfolio management, offering improved diversification, enhanced risk management, and the potential for outperformance. By identifying and targeting the primary drivers of investment performance, factor investing provides a systematic and transparent framework for constructing and managing portfolios. Trade with care. If you like our content, please feel free to support our page with a like, comment & subscribe for future educational ideas and trading setups.
AMEX:GSLCEducation
by financialflagship
Preparing For a HUGE Move...Hi everyone, In the last few days, the cryptocurrency market has been red after hitting the last resistance of the wedge we are in on BTCUSDT, which I mentioned that this would happen in my last post. After hitting the support that we are still in right now, the price has been consolidating forming Dojis candles. What we are sure of is that we are preparing for a huge move, especially since we are approaching some major events and news that are going to affect the whole market. What we want to know is whether, are we bullish or bearish. To find out, we need to look at the chart, especially BTCUSDT since it is the big Grandpa of all the coins. First, looking a the H12 timeframe, we can see that we are in a wedge and we are in the narrower part of it. Second, looking at the daily, I am still bullish. I even think that we are going to reach the 30k level this month or the next month since the price has been building a good structure. Buy-side liquidity is also being constantly taken. Another reason why it is bullish is that on the daily also, the 20 crossed the 50 ema to the upside while the price is retesting them at the same time. I usually call this pattern the "Smooth Cross" and it is a strong bullish factor. Third, looking at the higher timeframe, the weekly precisely, we observe that price has just recently rejected the 200 EMA, which is a bearish signal. Therefore, are we bullish or bearish? looking a the factors above, I lean towards being bullish until we reach the 30k level, as sometimes rejecting the 200 EMA can sometimes be tricky, and we have a really good structure on the lower timeframe. Please comment if you have any questions, I will try my best to answer them. Thank you😊
Long
by yassin_khanji
BONDS or EQUITIES? JPOWs major dilemma|YIELDS|INFLATION|MACRO|This will be a relatively detailed idea, but bear with me. There will be plenty of charts that speak for themselves, so I'll try to keep it as short as possible. Since everything is connected, the analysis will contain three parts, including yields, inflation, macro indicators. I will post an additional analysis of equity factor performance during rising yield spreads, sometime in the near future. Firstly, SPY/IEF is an interesting ratio if we disregard the negative dividend carry. Given the recent volatility in the bond markets, I chose to use IEF instead of TLT, however the difference is not that major when it comes to moves of the 10 and 30 T bonds. EIF principally holds 10 year US treasuries, with an effective duration around 8. I ) YIELDS In essence what the charts shows is that whenever the ratio has been near the top of the channel, an equities correction has followed. There are many reasons why bond yields affect equities. The main reason of course being, the fact that yields are used as a discounting factor, higher yields imply lower present value. This is particularly detrimental for growth stocks, whose cash flows Secondarily, higher yields also imply higher interest expenses, which in an extremely debt ridden economy, companies in the junk spectrum are particularly sensitive to. More on this later. An even more interesting ratio is the IWM/IEF ratio. The reason here being that companies with small market caps tend to have larger betas, and the higher the beta the larger the systematic risk exposure. Based on the argument above, higher yields certainly implies higher systematic risk. Therefore, at the point at which yields become troublesome, this should be first be observed in IWM/IEF ratio. The current consensus is that bond yields will start to hurt equities around the 1.4%-1.5% range. However, these levels can still be considered at the lower range, considering that in the previous three cycles the 10Y-2Y spread returned to 2.5-3%, marking a full inflation expectations recovery (fred.stlouisfed.org). Below are charts 10Y treasury charts for the past 10 years and the past year. What seems to be the problem is the sudden acceleration in rising yields, marked by the breakout from the Biden factor initiated momentum channel. In theory, a higher bond market volatility, is quite an issue for volatility targeting strategies, as they are forced to decrease overall exposure, further exaggerating the ongoing crisis. II) JPows dilemma, bonds or equities? For the past 10 years, the average inflation for most economies globally has been well below their CBs targets. I guess this inspired the FED this time to even encourage inflation expectation beyond the 2-3 % range. The actual problem here of course is that bond holders would require compensation for the inflation premium. Why hold assets that essentially decrease your purchasing power?https://fred.stlouisfed.org/graph/fredgraph.png?g=BphU The past week, with a conjecture of many factors 10Y yields have been completely out of control. There are two main ways to deal with rising yields in a debt ridden economy, implement yield curve control (YCC), Japanese or Macro Prudential way. It's extremely difficult to know exactly how equities will react in the short and long run, and whether the Japanese example is of any relevance. But what's certain is that, a Japanese YCC would cap rates at a given rate (let's say 1%), by setting a price at which the FED buys treasuries excess supply of treasuries. This case is the most bullish for equities, as the monetary base further expands. The question is whether this is constitutional. The Macro Prudential way, would be to force savings institutions (pension funds) to hold more treasuries, driving yields lower. In essence, this would imply a transfer of wealth between the borrower (young) and the saver (old) on a massive scale. This is the bearish case for equities, as the funds would have to decrease their equity holdings in order to buy more bonds. (Idea attributed to R. Napier) Of course, the FED could also decide to do nothing, in which based on similar occasions in the past, we should have a minor correction and/or choppy markets in the near term. I am not even going to guess which direction will the FED choose, we'd just have to wait and see. Any YCC measures would be particularly detrimental for banks. The financial sector has been picking up momentum against tech for the first time in more than three years. III) Is inflation really, really coming? Macro indicator analysis The economy seems to have rebounded extremely well. Here's why. Capital expenditure bounced of extremely well, compared to 2009 and 2001 (fred.stlouisfed.org). The same could be said for Durable goods (fred.stlouisfed.org) and new housing permits (fred.stlouisfed.org). Unemployment declining rapidly, but is still high (fred.stlouisfed.org), which in essence is quite bullish as it implies a accommodative policy until "full" employment is achieved. And of course, corporate earnings are set to rebound fred.stlouisfed.org Likewise, HY credit spreads are at the lowest levels they've been in the past 20 years (fred.stlouisfed.org and fred.stlouisfed.org). Savings rates are high, especially the latest reading for January, an increase of nearly 10% (fred.stlouisfed.org) implies for a further potential that the saved money will be put into the economy once it reopens. Money supply growth is at the highest levels recorded for the past fifty years (fred.stlouisfed.org). Additionally, wages pressures that are mainly legislative should also drive demand pull effect on inflation. Each of these measures to a large extent imply a risk of overheating once the economies fully reopen (perhaps this summer). On a global scale, Chinese GDP is "apparently" rebounding, and the Eurozone is noticing first signs of inflation picking up. However each of these measures is troublesome. There are many reasons but I will go through them briefly. Firstly, the housing market is since a long time has been dysfunctional. The rent moratorium implies, that there is additional debt accumulation, that'll drag down spending. Additionally, foreclosures seems to be postponed, driving the real estate supply squeeze. Savings rate are mostly accumulated by high earners with arguably much lower propensities to consume. Higher minimum wage pressure could easily be negated by business hiring less workers or lower hours worked. The most important factor of all is the fact that the dis-inflational tech/innovation factor still persist, and is perhaps even stronger than ever. At this point I'd argue that since the breakeven inflation rate is still below 2.5-2.7% which has been the top range for the past 20 years(fred.stlouisfed.org), inflation risks are perhaps too far exaggerated. Yes, governments are directly sponsoring extremely risky loans to business (CARES act), dramatically increasing money supply. However, at the end of it all governments can raise taxes directly or indirectly(locally), to cover for these fiscal expenses, which is especially viable right now as the Dems hold a trifecta in DC. This should also take care of Money supply growth. Come second half of 2021, we will see the kind of tax amendments the Biden admin will propose. Retroactive tax code changes would be particularly detrimental. This is it for this detailed macro top-down analysis. There are many other factors to analyze, but the analysis is already extremely elaborate. In the following weeks, the key events to follow are, the quarterly triple witching, how the FED decides to deal with yields if they continue to climb towards 2 %, and todays vote on monetary stimulus and minimum wages. Dip buying may seem very attractive at this point. However, I would caution buying any dips as long as the bearish trend in 10Y treasuries persists, and at least wait until the markets are past the triple witching . In my next idea, I will evaluate performance of equity factors for the last 20 years. -Step_ahead_ofthemarket ________________________________________________________________________________________ >>I do not share my ideas for the likes or the views. This channel is only dedicated to well-informed research and other noteworthy and interesting market stories.>> However, if you'd like to support me and get informed in the greatest of details, every thumbs up and follow is greatly appreciated! Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content- contact me through any of my social media channels.
AMEX:SPY
by step_ahead_ofthemarket
5
Profit factor world record!!I spent a week curve fitting Lambo script for the SPY/ES futures market and today all the parameters hit the sweet spot with super high profit factor. I did it by severely limiting the script's ability to go short. All metrics for trade entering is very specific with longs operating off a 300 moving average and shorts operating off a 120 MA. I used FRAMA as the main MA and DEMA to determine tops so that longs don't get trapped. No stop loss. The primary mechanism triggering when to buy and sell is the indicator I created last week. I also converted CCI into one of the indicator rows for a total of 6 rows. The top row tracks CCI and the rest below track price. I also used VWAP. There are a ton of things going on in this script and it would be impossible for a human to check and confirm every and all parameters before trade entry. That being said, I wish there was a way to automate paper trades using the signals from a script. I'll release indicator prob next week.
CME_MINI:ES2!Education
by ZombieStar
14
MACRO VIEW: MARKET RISK TO S&P 500 - DIVERGENCE OF DSPP AND TRANTransportation is one of the key industries of US economy, while paper index traces performance of companies involved in packaging of all the goods shipped. General understanding is that if fewer goods are being packed and transported, fewer goods are being bought, which in turn means a slowdown in US economy (measured by GDP, which is approximately 70% retail sales). Thus if stocks of US transportation and paper companies decline in advance of broader market indices, it could well signal a slowdown in US economy not yet accounted for by the general investing public.
SP:SPXShort
by Killy_Mel