Yesterday's rally did not turn out as well as expected. After opening up, N. American markets drifted downwards all day, culminating with a sharp slide that caused a negative return by end-of-day. Asian markets were mixed overnight. Europe opened down but has been rallying this morning. Perhaps we may be working through the sellers and forming a short-term bottom. Again, I do not expect it to last. Despite all the rhetoric coming out of the traditional bullish camps, I don't get the impression that everyone is waiting to jump back in with two feet and increase risk/leverage. The opposite, in fact -- people seem wary. And how long are investors going to tolerate large losses from these funds before they bail-out?
A recent report by Lehman Brothers on the quant-fund massacre last week http://www.dealbreaker.com/images/pdf/quant.pdf provides a few interesting lessons:
1) Language it important: your model did not blow up, it "misbehaved"
2) Turns out everyone is running the same model (more or less). Oops! How did that happen? (hint: everyone is using the same dataset and techniques to build their models)
3) The market has acted in unexpected ways. Funny that -- I always thought the market was predictable, as long as your computer programme was big enough
4) When things go really wrong, blame the asset class, not the manager!
MARKET POSITION: SHORT (2 UNITS)
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