- New Science in old markets -


Summary guide to the HED analysis

At HED we analyse markets with the aim of predicting what they will do next and when they will do it. We use tools from behavioural finance, most of which we have either built ourselves or shared in developing. The common thread is feedback, in which a cause and effect are linked in a loop that can magnify the effects or diminish them – usually called positive and negative feedback. We take particular care to use plain English at all times some except for some technical terms which are defined here. They are:

Extensions and Compressions. These both come from measuring the market sentiment at multiple time-frames and using the results to see when current conditions will change -

Reveal that the mood has become uniform in a trending market meaning those who can join in have already done so and the trend is about to end. Trends often reverse at, or soon after, an extension although this is more common after a down trend. The trend may also ‘flatten-off’ prior to a sideways period which the fundamentals ‘catch up’ with the price. Examples of both are shown here. A new trend will start in due course, and if this does not happen immediately after the extension then it will often do so after the opposite kind of sentiment signal, which are called:-

Mark moments when disagreement among the various market participants reaches a peak which is when trends often start. There is no way to predict which way a market will move after a compression, only that a move is imminent. This example is of a down-trend but an uptrend is equally likely. These extension and compression examples come from the same period of market history but from two different instruments – these signals require a demanding set of conditions to be met before they are generated, so we have to examine many markets to have the best chance of seeing them. For more on this, see the full user guide.
Turns – these are moments when we expect a market to stop trending one way and start trending another. We identify turns by disassembling the multiple price cycles that are generally present in all markets then re-combining the underlying ‘driving’ cycles to see where important highs and lows should occur in the future. We publish the dates in advance with some indication of the strength of each turn.

Commentary and advice
We write commentary on the general state of the markets in 'HEDlines', making firm trading recommendations from time to time in 'AlphaMail' and these tools listed above are part of the analysis that we use. We also keep an eye out for the general rise or fall of feedback effects as these can dominate the markets at any time frame. Doing this meant we were the first to notice that the introduction of the Euro would magnify Germany’s export success and penalize the Southern European economies and that the first-ever real-estate boom would then start in Germany. We used this same approach to warn of a real estate bubble in the US and the attendant risks to the banking system there, before it was obvious to most others. These longer-term observations are rare.

Trades and portfolios
The streams of analysis and trades that are published here as HEDlines and AlphaMail cover similar ground. Trades will almost always appear in HEDlines first and AlphaMail provides extra information as to where a volatility-adjusted stop should be placed on a position to limit loss to 1% of a notional portfolio and a level beyond which some profit-taking could start. In addition AlphaMail provides a 'time-out' date that is 15 trading days in the future when positions should be abandoned if there is no favourable progress in the trade. From time to time we publish less crucial guidelines, such as a reminder to start reviewing commodity trades for earlier 'time-out' after 10 days because sudden volatility is more likely in those markets.

The results of all AlphaMail trades are collected as the 'all markets' portfolio, results of which are published here with the stops, time outs and profit-taking rules applied exactly as published. There is a separate portfolio called 'S&P only' which contain only trades in US equity instruments - mostly index futures but sometimes ETFs too. This portfolio uses different exit rules and aims to hold on to positions for longer periods. Both these portfolios may omit trades published in AlphaMail if there is no capacity the portfolio is full of existing trades.

These two portfolios are blended together to run the HED Futures Fund portfolio. Firstly, any US equity trades are extracted from the 'all markets' portfolio and replaced by the contents of the 'S&P only' portfolio in the ratio:- 'all markets' 60:40 'S&P only. This usually makes little difference to the US equity positions involved - they are usually the same unless capacity has kept trades out - but the US weighting is much higher in the fund portfolio.

- Full userguide available here