June 9, 2007: The power of visualization

  • A slight format change.
  • Market gyrations (again).
  • A picture worth a 1000 words.
  • Current ETF rankings
  • Next column spoiler
  • A slight format change

    Thanks to those giving me feedback. Even if you think it is unimportant, please send feedback. Here's what I learned: what I write is too long and too infrequent. So as of today the columns becomes shorter (This one is ~760 words excluding lists/charts; which is 3.6 (!) times shorter than the previous) and hopefully a bit more frequent. I'm thinking a column every 3 weeks, instead of every 2 months or so. Please email me about what you would like to see or hear, or if you'd like to get off the list, thanks!

    Market gyrations (again)

    It happens every few months, with some regularity. Markets take a turn south, and everything starts moving down, except the inverted ETFs (those that are short the market, or invested in puts). Even if I pick the least correlated ETFs -- those which look like they are trying to stay away from the herd -- even those, suddenly start moving down, together with the herd.

    Sometimes, not always, the precious metals move the opposite way, but as market historians know, investing in Gold has been, on average, a pretty bad idea. After a great Gold rush run, in the past 12 months, Gold is up a measly 6.6%, while the S&P500 is up more than 20%.

    I was much more worried around May 10, 2006 when I first saw the "everything turns down" phenomenon in the ETF data I started collecting in February 2006. At least now this has become a familiar pattern.

    The fears now are that earnings are slowing down and the markets are over-extended. In Q1, 2007 there were similar fears, expectations for the S&P500 corporate earnings were for about +3% YoY (same quarter, year over year) earnings gains. When earnings came out at about +9% YoY, on average, the markets rallied with great force.

    Is this time the same as in the last summer, or last February? Different? Will earnings really be much weaker this time around? I don't know. If I ever know, and I'm working on it, I promise to share. Here's what I do know. The more I look at the raw-data and the more powerful tools I use, the easier it becomes the get insight. I'll provide more evidence for that in future columns. Which leads me to today's main (and shorter!) theme.

    The power of visualization

    Take a look at this piece of ETF data. Each line represents one ETF and contains 3 points: Assume this data set has a few hundreds rows (we have over 400 ETFs by now, but we ignore some for lack of sufficient historical data.)

    	AlphaD	 GMValue Risk
    	13.83	 4.2934  1.1291
    	 3.91    5.1225  1.1306
    	-0.83	 4.9438  1.1329
    	32.02	 4.6334  1.1360
    	10.16	 4.2447  1.1384
    	12.29	 4.7403  1.1387
    	 8.07	 5.3634  1.1421
    	-2.59	 4.8569  1.1426
    	-6.51	 6.7249  1.1428
    	-4.14	 4.8775  1.1481
    	 4.21	 5.0715  1.1493
    	 2.03	 2.9636  1.1506
    	 5.27	 4.7843  1.1518
    	 5.10	 4.7260  1.1525
    	 1.30	 4.2323  1.1600
    	 3.89	 3.5602  1.1620
    	-7.36	 4.4344  1.1641
    	[a few hundred more points omitted]

    It is hard to make sense of it. It is certainly very hard to get any feel of what's "going on" in the markets based on this seemingly random data. Add more data and it becomes even more incomprehensible.

    But convert the data to a chart and suddenly things become so much clearer. Human eyes in combination with the human brain can grasp patterns amazingly well. This is what we realize when we say that a picture is worth a thousand words, or when we can "recognize" a smiling clown in the complex shape of a cloud overhead; all in the blink of an eye.

    In this case we map the 1st two numeric columns to the X, and Y axes and the 3rd column to the radius of the circle. We also paint circles where the 3rd column is smaller than 1.16, green instead of blue and invert the ratio so smaller ratios produce bigger green circles to emphasize circles that are "less risky."

    [ETF interactive chart, requires JavaScript]

    Perhaps the most significant pattern that emerges from this chart, is this:

    And by making this very obvious observation, we've just (I hope) convinced ourselves that current markets have a strong preference for value over growth. This partly explains why our current strategy has been weighting value as an important factor in picking ETFs. Things, of course can always change, but then we hope that our charts and models will change too.

    Current ETF rankings

    [Note very dated material]
    Here are last Friday's rankings (top 40 ETFs):
    Using mmvr ranking method on 20070608
    1	 3.2041	EWY	iShares MSCI South Korea Index
    2	 3.0879	TTH	Telecom HOLDRs
    3	 2.9750	EWG	iShares MSCI Germany Index
    4	 2.9378	VAW	Vanguard Materials VIPERs
    5	 2.8411	RPV	Rydex S&P 500 Pure Value
    6	 2.8109	RFV	Rydex S&P Midcap 400 Pure Value
    7	 2.7839	ADRU	BLDRS Europe 100 ADR Index
    8	 2.6697	ADRD	BLDRS Developed Markets 100 ADR Index
    9	 2.6010	PXE	PowerShares Dynamic Energy Exploration
    10	 2.5668	PRFE	PowerShares FTSE RAFI Energy
    11	 2.5603	FEZ	streetTRACKS Dow Jones Euro STOXX 50
    12	 2.5599	PKB	PowerShares Dynamic Building & Construction
    13	 2.5432	PWP	PowerShares Dynamic Mid Cap Value
    14	 2.5391	VOX	Vanguard Telecom Services VIPERs
    15	 2.4942	XLE	Energy Select Sector SPDR
    16	 2.4860	EZU	iShares MSCI EMU Index
    17	 2.4670	IEO	iShares Dow Jones US Oil & Gas Ex Index
    18	 2.4668	IXP	iShares S&P Global Telecommunications
    19	 2.4028	RZV	Rydex S&P Smallcap 600 Pure Value
    20	 2.3693	IYZ	iShares Dow Jones US Telecom
    21	 2.3653	PRF	PowerShares FTSE RAFI US 1000
    22	 2.3186	PWV	PowerShares Dynamic Large Cap Value
    23	 2.3101	EFV	iShares MSCI EAFE Value Index
    24	 2.3025	EWQ	iShares MSCI France Index
    25	 2.2989	EWN	iShares MSCI Netherlands Index
    26	 2.2964	IEV	iShares S&P Europe 350 Index
    27	 2.2957	DIA	DIAMONDS Trust, Series 1
    28	 2.2840	VTV	Vanguard Value VIPERs
    29	 2.2795	VDE	Vanguard Energy VIPERs
    30	 2.2513	DBN	WisdomTree Intl Basic Materials
    31	 2.2291	EWC	iShares MSCI Canada Index
    32	 2.2262	IHF	iShares Dow Jones US Healthcare Provider
    33	 2.2252	RYE	Rydex S&P EqWght Energy
    34	 2.2186	PPA	PowerShares Aerospace & Defense
    35	 2.2098	DKA	WisdomTree Intl Energy
    36	 2.2021	VGK	Vanguard European Stock VIPERs
    37	 2.1944	JKF	iShares Morningstar Large Value Index
    38	 2.1806	EWP	iShares MSCI Spain Index
    39	 2.1795	ELV	streetTRACKS DJ Wilshire Large Cap Value
    40	 2.1755	EWK	iShares MSCI Belgium Index

    Next column spo^H^H^Hteaser

    In the next column we'll see how can we visualize a market strategy. Stay tuned.

    -- ariel