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Regimes

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Regimes

Chaos. Order. Disorder.

Shyam Sunder
Mar 18
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Regimes

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This week, we continued our exploration of distance measures. We did a simple backtest to see if Mahalanobis distance can be used to detect regime shifts to help switch between stocks and bonds.

The problem with “regime switching” models, broadly, is that markets don’t give you clean breaks. There are periods where things are murky and there are periods where the market keeps hopping between different regimes. During these periods, you end up giving back a big chunk of profits made in the clear regimes. Add transaction costs into the mix and these models under-deliver on their promises.

To side-step some of these problems, our backtest looked at weekly returns, rolling measures and split datasets. And we feel that there is enough in the backtest to warrant more research.

You can read about it here: Mahalanobis Distance

Markets this Week

Banking stocks continued to drag markets. KRE 0.00 , the US regional bank ETF, is now down 45% from its 2022 peak.

Markets turned on First Republic Bank, considered the weakest among the regional banks in the US. And across the pond, Credit Suisse, considered to be the weakest among European banks, was beat down.

Given all that is going on state-side, Indian indices were remarkably resilient.

However, lots of chaos under the hood.

And it looks like US tech stocks are already celebrating the end of rate hikes.

Nothing gives the gold-bugs and crypto-bros wings like a good ol’fashioned banking crisis.

More here: country ETFs, fixed income, currencies and commodities.

Links

It looks like a lot of regional banks just straight-up speculated on an early Fed pivot and lost.

Nearly 60% of non-dealer banks are not holding any protection against a rise in bond yields. (ifre)

There are 186 U.S. banks where, if half of uninsured depositors quickly withdrew their funds, even insured depositors could face impairments because the bank wouldn't have enough assets to make all depositors whole. (ssrn)

But let’s not ignore the fact that the Fed’s stress-test models in 2022 did not even consider the possibility of rising interest rates. (investing, wsj)

~

Volatility chopped some heads off this week.

Quants lost money. Brokers lost money. Discretionary managers lost money. (FT)

Twitter avatar for @macro84
Macro84 @macro84
Hedge Fund Indices: HFRX indices report with a 1-day lag but the macro systematic CTA index had its second worst week on record through Thursday as rates reversed hard. Chart -HFRX Macro Systematic weekly returns:
Image
3:53 AM ∙ Mar 18, 2023
10Likes3Retweets

~

DM in the streets, EM between the sheets.

The London Metal Exchange has found bags full of stones at one of its warehouses instead of the nickel they were supposed to contain. (reuters)

~

People are legit pissed at some VCs for yelling “fire!” in a crowded theatre.

Remind me why, exactly, these guys have so much control over technological innovation? (slate)

Twitter avatar for @M_PaulMcNamara
Paul McNamara @M_PaulMcNamara
it's not a bailout unless it comes from the bailloute region of France. Everything else is just sparkling free money for rich people.
4:30 PM ∙ Mar 13, 2023
509Likes95Retweets
Twitter avatar for @schwarz
🦀 Jon Schwarz 🦀 @schwarz
I admire Silicon Valley libertarianism, because it's based in the firm, clear principle that it's illegal for them to lose money
12:55 PM ∙ Mar 13, 2023
10,645Likes1,380Retweets
Twitter avatar for @chrismohney
Chris Mohney @chrismohney
people thinking Peter Thiel should be ashamed by insitgating a bank run and consequent financial carnage need to understand he’s the kind of guy who would somehow find a way to make the trolley problem train kill everyone on both tracks
3:09 PM ∙ Mar 11, 2023
10,967Likes1,993Retweets
Twitter avatar for @tweetsbyparker
parker lyons @tweetsbyparker
the libertarianism leaving VC’s bodies when their banks default
Image
5:43 PM ∙ Mar 11, 2023
10,492Likes1,706Retweets

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When the Twin Towers went down, was it a single act of terror or two?

Twitter avatar for @AlecMacGillis
Alec MacGillis @AlecMacGillis
Wow. Boeing is arguing that it is not liable for victim suffering claims in Ethiopian Airlines 737 MAX crash because "victims died painlessly because the airplane crashed into the ground so fast that their brains didn’t have time to process pain signals."
wsj.comBoeing’s Legal Dispute: Did 737 MAX Victims Suffer Pain Before the Crash?Plaintiffs’ attorneys say relatives of crash victims are legally entitled to damages beyond their own grief and loss.
6:07 PM ∙ Mar 16, 2023
7,033Likes2,561Retweets

Meme of the Week

Twitter avatar for @Ninjascalp
Ninja @Ninjascalp
Bull market 2023 10/10
12:35 AM ∙ Mar 15, 2023
1,859Likes592Retweets

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Regimes

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Yogesh
Mar 19Liked by Shyam Sunder

As always, interesting and insightful 🙏🏻👍🏻

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