Let’s Talk About the True Overbought Nature of This Market

Sometimes I feel like we’re all caught up in a state of cognitive dissonance. True idiots, men who wouldn’t know the first thing about money management, are now stars in a market that simply refuses to trade lower. I am many things, one of which includes being a pseudo-intellectual in dozens of topics — competent enough to hold a conversation with just about anyone in subjects ranging from math to poetry. What I am, however, is an actual expert on money management, machine learning, and mean reversion.

I created Exodus back in 2008 so that I could have algorithms learn the market for me and produce actionable trades. Through mean reversion, I was able to discover a true edge, buying into dips that scared most people into cash. Typically we’d get one signal per month, maybe 10 per annum. But over the past two years, it has been slim pickings. Over the past year, even slimmer. The last systemwide OS signal was in March, before that June of 2016. Do you have any idea what that means? It means the plebs, the chaff of society, are swimming in riches — something that has been, at least from a historical perspective, rueful.

Because of this change in character, my assumption was that machine learning alpha, meaning trends, would be the single best way to invest in the market — aside from the static SPY purchase. But with just SPY, there is no active management and potential to hedge downside. I was of course correct, but most of you are still enamored by the glitz and glamor of position trading, like monkeys swinging from branch to branch in search of bananas. My quant trades, done each and every Friday, have beaten the SPY in 14 of the past 20 or 21 weeks. I need to keep better accounting.

My idea was to segue this development into my asset advisory business, which is still in its planning stages. I’ve taken the past two years off from active management to do other things, detox from the inertia of daily headaches and client bullshit.

One thing is for certain, this detente, this uninterrupted zeal of chance, is unsustainable. This isn’t a missive about the end of days, crying chicken little, or the virtues of being careful. I, for one, have not been a careful investor and anyone who read my book knows that I was a wild maniac in the boardroom. But something must be said about record low VIX and the uninterrupted rallies, 55 record Dow levels year to date, barreling into a new Fed Chairman who isn’t an economist.

Just like in the robber baron days of the 19th century, our present wealth creation is wholly concentrated amongst the very top. Look at the YTD returns of our largest capped stocks — unbelievably absurd.

On the issue of part 2 of my book. I finished the rough draft and will leave it alone for a week and then begin to edit and curate it. My guess, it’ll be ready in about a month or two.

Here’s a snippet, from part two of my story on Wall Street, tentatively titled ‘Journey into Fear.’