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On occasion, it helps to step back and check out what new ideas might be percolating in the brains of others, ideas you might find useful. For Americans, one of those ideas could be misconstrued as being un-American: If you're a Yank, maybe you should be looking overseas for good trading markets. If you take a look at the Futures Liquidity table that STOCKS & COMMODITIES publishes each month, you'll see that the most liquid markets aren't necessarily in the United States; you'll discover that LIFFE and Eurex products are certainly worth a look. It's true that the Chicago Mercantile Exchange's Standard & Poor's products and the Chicago Board of Trade's bonds still lead the pack, but five of the top 10 liquid markets are across the Atlantic. If you throw in Euros, that's six of the top 10, with the Euro government bund not far out of the running. That's globalization!
Another idea that's being bandied about is risk allocation. For traders, asset allocation has often come down to being little more than diversifying trading markets, and portfolio assessment is barely in its infancy, given software publicly available. Asset allocators believe(d) that the majority of return was owed to the selection of assets (given their appropriate diversification) and their expected returns, though expected volatility and correlation among asset classes were given nods as well. Risk allocators start with the volatility of their assets and the correlations among them when looking at portfolios, though return is certainly assessed. Growth in the value of an asset will stimulate rebalancing but so will rising/lowering volatility levels or shifting correlations with other assets. For short-term traders, this sort of assessment could have a grand impact, as one market's volatility shifts dramatically in relation to others. That's something else to explore.
And here's something I would never have suspected: sustained cyclicality in volatility. I was alerted to this by John Bollinger, who's promised to explain the whole thing to us in sentences of seven words or less, in an article coming up soon. The bottom line is the prospect that a tradable item like volatility may be cyclical and therefore predictable. Stay tuned.
Finally, I refer you to the ideas put forth in the S&C interview this month with behavioral finance guru Hersh Shefrin. As he points out, this field has been developing for decades, but with the availability of large databases of investor activity, it's becoming possible to assess not only how individuals respond to the market and the stimulus they get, but also how investors as a group respond to stimulus. Does the "crowd" really exist? In the next few years, we should have the first academically rigorous definition of the "crowd" and the definition of its impact. What we in technical analysis have tried to capture for years may finally be taking shape in front of us.
Good Fortune!
