Update: Predicting the Markets Research

Keith Fitz-Gerald Oct 25, 2019
16 

I trust today’s email finds you well and set for a fabulous weekend. Fall is in full swing here as the leaves turn brilliant shades of orange, red, and maroon. The temperatures are dropping and snow’s already piling up in the passes which means another one of my favorites – skiing – is just around the corner!

Anyway, that’s enough about that!

My data scientists and I have made a lot of progress in recent weeks when it comes to predicting the markets. So, knowing you’ve got a keen interest in what I’ve been up to in this department, I thought you’d enjoy an update on some of my most recent research.

Without further delay …

One of the crucial measures in any predictive data set is something called “MAPE” which stands for Mean Absolute Percentage Error. It’s a statistical measure used to gauge how accurate forecasting systems are or as a loss function in machine learning.

What I like about MAPE is that it’s easy to interpret because most folks are used to thinking in percentage terms so talking about the absolute error in forecasting models makes sense.

My predictive MAPE is consistently between 1% and 3% — and here’s the cool part – as many as five days in advance. On stocks, on ETFs, on bonds… in fact, on every financial instrument my team and I have tested.

Take a look.

Interestingly, this “run” isn’t as tight as I’d like but, in keeping with my desire to be completely transparent, I’m not holding it back. Unlike many of my peers in this industry, I don’t believe in cherry-picking to make something appear better than it is.

You can see that the predicted line in green reflects a drop over the next five trading days even as the indices inch into yet more record territory.

That’s called a “divergence” in technical trading terms because two important data sets are going in opposite directions. Usually, this is interpreted as a precursor to a major move.

Not always, though.

Remember, we’re talking about projecting the future five days in advance – meaning the actual divergence hasn’t happened yet. But could.

That’s obviously hard to predict but not unreasonable to think about which is why I created a related tool called the “accuracy counter.”

I wanted to know how far “on” or “off” predicted data is from actual in real time because that knowledge will allow me to make potentially very profitable decision based on the “correctness” of projected directional trends in addition to anticipated price movement.

Here’s what that looks like.

[BREAKING] You Better See This Now (Tom Is Telling All)

I designed the calculations to quantify the percentage of total data points in a given analytical period – in this case 240 data points – are correct when price and direction are taken into consideration at the same time.

This is a significant twist to conventional thinking which normally views calculations like this discretely and one with surprising results. As you can see, the projected data is correct 80.83% of the time.

There’s still a lot of work to do (and coffee to drink during my marathon all-nighters, which, thanks to my lovely wife, Noriko, is in ample supply) but the thinking – and my research – is presently focused on how we can use that to trade what happens next before other folks realize it’s even in the cards.

There are loads of people who have tried to do this, but they’ve all got a critical flaw in the math they use. Generally speaking, the calculations they use are based on historic patterns and numerical sequences using probabilistic calculations.

Current options prices models, diversification, portfolio allocation, time-based calendar calculators, price based tools… they’re all based on what’s already happened and the – flawed – assumption that there will be something similar happening in the future.

Contrary to what many people like to think, there’s no predictive value in that whatsoever. Zero, zippo, nada, bupkis, zilch.

However, there is an edge when you have a forward-looking tool like this one at your disposal.

Options premiums are inexpensive when prices are rising which means you can place a series of relatively inexpensive directional bets before things get out of hand. Then, laugh all the way to the proverbial bank when volatility explodes and prices go along for the ride.

I’m still doing a lot of research in this department. Today’s markets trend toward complexity, but the irony is that simplicity is where the real profits hide if you know what to look for.

The most straightforward and potentially profitable way to trade a situation like this is to buy a string of weekly put options at the money, but inverse funds could make a great alternative, too. That’s where gamma – a measure of price sensitivity – is highest and you get the best bang for the buck.

Even the normally taboo triple leveraged funds I encourage you to avoid like the plague could be a great source of profits as would various spread combinations. All of which, I’m still researching.

Speaking of which, I want you to do me a favor.

Please.

[URGENT] A $6 Stock Could Be About To Change Everything

Post your best questions and share this column with friends who you think may have an interest in the predictive work I’m doing through my sister company, Fitz-Gerald Research Analytics. That’ll help shape my research efforts.

Depending on what we find together, it could even help me help you make a fortune.

Which is, of course, why we’re all here and in this together.

Have a fabulous weekend!

Until next time,

Keith

16 replies on “Update: Predicting the Markets Research”

  1. Graham says:

    Greetings from โ€˜Down Underโ€™.
    As a long term supporter of MMP I would love to be kept in the loop in this fascinating area of predictive analysis.
    Keep up your excellent work Keith.
    Watching this space!

    1. Keith says:

      Hi mate and thanks so much for being part of the Family! I appreciate the kind words and will definitely keep you posted. I’m more excited than I’ve been in years about this research and that’s saying something considering I’ve spent decades pursuing it.

      Best regards and thanks, again, for being part of the Total Wealth Family, Keith ๐Ÿ™‚

  2. Vitaliy says:

    Thanks so much for the two recommendations (ACM and BC) Both deals yielded almost 110% each (+ $ 330). I look forward to the following recommendations with the king to save up for a full subscription to recommend to others . I understand how important it is for you to receive feedback on your work. Thank!

    1. Keith says:

      Fabulous, Vitaliy!

      I try very hard to come up with big winners (which, admittedly, doesn’t always happen); I’m thrilled to hear that’s the case for you. Please continue to let me know how you’re doing and keep me posted on any feedback you’ve got!

      Best regards and thanks for being part of the Total Wealth Family, Keith ๐Ÿ™‚

  3. Martin says:

    Thank you and Bravo from a fellow coffee-fiend

    1. Keith says:

      Thank you, Martin!

      My favorite is either Kona or a some sort of Viennese blend, ideally with an apfelstrudel or a sachertorte. What’s yours?

      Best regards and thanks for being part of the Total Wealth Family, Keith ๐Ÿ™‚

      1. Martin says:

        A cafetiere of Illy or Lavazza, or else a cup (or two) of Nespresso

        1. Keith says:

          Fabulous! We have one of those Nespresso thingies and love it. – Keith ๐Ÿ™‚

  4. Alan Hulshart says:

    Why not cherry pick the best leading economic indicators and put them into your predictive model for a more accurate trend?

    1. Keith says:

      Hi Alan!

      Thanks for asking. The problem with most economic indicators is the “slop factor” – meaning they’re not accurate enough to develop a working data set with predictive value of the kind we’re looking for. That, in turn, means the MAPE and Accuracy Count, to use terms in today’s columns, are waaaaaayyyy off in left field. If you’ve got any suggests I may have missed, please let me know!

      Best regards and thanks for being part of the Total Wealth Family, Keith ๐Ÿ™‚

  5. James Hoyt says:

    Keith, I need your take on the FED which is now generating over 60 million dollars a month leaving us to believe there really is no QE taking place, and that we are actually heading down a very dangerous road? This comes from a read from The Critical Signals Report most recently.

    1. Keith says:

      Hi James.

      I’ve seen that data, too. It’s definitely distressing but – and I stress this with a huge grain of salt and a big grin – the Fed’s been distressing for years now. There will ultimately be hell to pay but our job as investors in the meantime is to make as much money as we can consistently, prudently, and with proper risk management. I’m watching the situation closely and have no doubt you are, too.

      Best regards and thanks for being part of the Total Wealth Family, Keith ๐Ÿ™‚

  6. Leslie Dawe says:

    Hi Keith,

    By looking at the graph it appears you are undeshooting when the market is going up and overshooting when it is going down. The overall shape of the prediction is fantastic!!! Maybe you can compensate this shift to get it to fit perfectly. Hope this helps.

    All the best,

    1. Keith says:

      Thank you, Leslie. This has been a long, long slog to get to this point. The early prediction models were all over the proberbial map so hearing you say that is really meaningful. Thank you – and we ARE working on shift compensation as I type.

      Best regards and thanks for being part of the Total Wealth Family, Keith ๐Ÿ™‚

  7. Leslie Dawe says:

    Hi Keith,
    Thinking about my previous comment I want to add the following:
    If you are using the options expected move (EM) as part of the forward looking target in your calculations, you would have to take into consideration the following: the EM is calculated with a horizontal trend in mind. However, if the stock is in an upward or downward trend then this should affect the EM, moving it slightly higher (upward trend) or lower (downward trend) by some factor depending on the slope of the trend. If you are not using the EM then please disregard this comment.

    All the best,

    1. Keith says:

      Hello again, Leslie. That’s a very interesting idea and one we have explored. We’ve gotten better results with skew than with EM lately as a function of the “fat tails” phenomena that is now priced in. Still very much a work in progress though and I’d love to chat about it some time. You clearly have a background in this area based on your observations.

      Best regards and thanks for being part of the Total Wealth Family, Keith ๐Ÿ™‚

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