We are accustomed to splitting trading into technical and fundamental buckets. Both involve crunching data; one set includes market fundamentals and the other pure price data. Alternative data is a third bucket that is gaining traction.
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For years we in the financial media business have split types of market analysis and traders into two large camps: fundamental and technical. Fundamental traders would look at basic meat and potato supply and demand fundamentals and perhaps some proprietary insights to come up with their market outlook, while technical traders would look at market charts to determine patterns and momentum based on price data.
Merriam-Webster defines data as, “Factual information (such as measurements or statistics) used as a basis for reasoning, discussion or calculation.” Traders use data in all forms to construct the basis for their trading decisions. In the past, this involved earnings reports and sales statistics for equity traders and perhaps weather reports and supply/demand calculations for commodity traders.
London-based alternative data broker Eagle Alpha has listed 24 primary categories of alternative data. But, as you can see, the types of datasets are increasing all of the time. We have defined five types of datasets these various categories generally fit into along with how they are used.
The goal in trading is to get ahead of the herd. It’s best to anticipate what’s going to happen in the next five to 60 days and focus on major events. Is the top analyst going to upgrade a stock before earnings? Will global macro traders try to position hawkish or dovish around the next FOMC statement? Will the next crop report show more supply or demand? These are the questions; the answers to which will move markets.
Satellite data has become democratized with more data available at affordable prices and traders are finding unique ways to exploit it.
Data can become overwhelming in raw form. Some firms are providing web data for traders so they can stick to trading.
Quantitative hedge funds are significant users of alternative data, which is a main driver of its massive growth. We talk to one here.
Research is considered a very important part of the value-added by portfolio managers. Huge costs of structuring a research department require most firms to buy research from the sell side (investment banks and brokers). In-house research teams also like to supplement their research with alternative views from the sell side.
A unique form of alternative data is crowdsourcing earnings estimates. It works!
M Science, is a pioneer and leader in providing alternative data solutions to supplement core data in investment research. The company provides creative innovative approaches to buy-side clients through data partnerships, proprietary methodology and unique data sets to give intel to stay ahead of the competition and improve performance.
Social media data streams have exponentially grown the availability of data. However, this data is massive and unstructured. It must be harnessed to be of use.
Japanese candlesticks are a simple but useful tool in technical analysis, and the doji is one of its most powerful indicators for both bullish and bearish trades.
A look at long-term trends of commercial interest in the CFTC’s “Commitments of Traders” report.
The Cycle Projection Oscillator (CPO) is a technical tool that employs proprietary statistical techniques and complex algorithms to filter multiple cycles from historical data, combines them to obtain cyclical information from price data and then gives a graphical representation of their productive behavior. Other proprietary frequency domain techniques then are employed to obtain the cycles embedded in the price.
Healthcare play CytomX Therapeutics Inc. appears headed higher after a cup base breakout in early 2018. CTMX is higher by 120% during the last one-year period. Earnings have been mostly higher with three consecutive significant quarterly gains.
The coffee market offers a very attractive risk-adjusted return from the long side given a very compelling set of bullish long-term indicators and patterns. Currently, there is an extremely speculative short position as a percentage of open interest in coffee as measured by the Commodity Futures Trading Commission’s Commitments of Traders data.
Check Point Software Technologies (CHKP) is an “old tech” play that has grown by 19% during the last one-year period but is sitting 13% off its 52-week highs. Earnings momentum is weakening with back-to-back quarterly losses of 12.5% and 7.2% respectively.
One way to prevent losses in a deteriorating position is the use of stop-loss orders. A stop-loss order is activated when a stock, ETF or futures contract reaches a certain price point. Let’s use the example of Facebook. On the afternoon of Jan. 4, 2018, a purchase of FB is made at $185. After rising above $188 a stop is placed to sell FB at $184 (just below the previous high close) on Jan. 11. This means that at $184 the stop becomes a market sell order and the long position is liquidated.
In 2017, the pain trade was no doubt being long the euro/U.S. dollar currency pair. After predictions of euro/U.S. dollar (EUR/USD) currency pair to parity failed in 2015 and 2016, market strategists were finally poised to collect on those bets as the combination of easy monetary policy in the Eurozone and an accelerating United States economy supported by a tightening Fed made it feel inevitable that the EUR/USD would hit 1.00. Someone should have told EUR/USD traders, who instead drove the world’s most widely traded currency pair up by 1,500 pips from near 1.05 to above 1.20.
Numerous studies have demonstrated that spin-offs outperform the overall market by a large margin. Spin-offs, as a group, tend to outperform the broader stock market. During the past 15 years, (through 2017) the Bloomberg U.S. Spin-Off Index returned 999.4%, while the S&P 500 Index returned 203.9%.
Now that the hotly debated tax reform bill is a reality, potential winners of a corporate tax move to 21% from 35% are starting to emerge, but exactly how long those benefits will last is being questioned.
Donald Trump managed to close out his first year in the White House with a major tax reform package that had something for everyone, except for homeowners in deep-blue states, but most especially for investors. Among the highlights that have them so excited is a tax holiday allowing for repatriation of overseas cash. Investors are hoping that cash is used for more dividends and buybacks, but a safer bet could be on another round of merger mania.
A reconstituted Federal Reserve under new leadership will face tough challenges in the year ahead. Monetary normalization is well underway, with the Federal Open Market Committee (FOMC) having raised the Federal funds rate five times since it left the zero lower bound two years ago and started shrinking the bloated balance sheet built up through three rounds of bond buying.
Too much, too soon. The 36% increase in crude oil prices since August is likely to stimulate a strong production response, with a typical lag, sufficient to keep oil inventories elevated above the five-year average for all of 2018, despite the extension of OPEC’s production cut to the end of the year. It may even undermine OPEC compliance and negatively impact oil demand.
Eric Dugan was taught to work hard from an early age, which led him to not turn down opportunities regardless of the position or the hours. This habit allowed him to snag a tremendous opportunity at an early age. So when a friend of his — knowing his penchant for crazy hours — called with an opportunity working on an overnight trading desk, he jumped at the opportunity.
The explosive growth in the value of cryptocurrencies has led to overnight billionaires. As many of these cryptocurrencies have seen 10-fold growth and more, the general public is drawn to invest in unregulated cryptocurrencies. Professional traders, along with state and federal regulators, warn investors that they are purchasing unregistered securities on exchanges.
March appears to be a relatively non-distinct month on the trading calendar. It is not in the bottom or top quartile of performance metrics in any of the top three equity indexes. It lands at fourth best in the S&P 500, fifth best in the Dow Jones Industrial Average and sixth best in the Nasdaq Composite.
After the Bell
Investor Warren Buffet famously advised, “Be greedy when people are fearful, and fearful when people are greedy.” Many investors say the safest and most potentially profitable assets to buy are the ones that nobody likes. This is a mistake. Classic cars are negatively correlated to downward moves in the major indexes, as evidenced during the crisis of 2008 to 2011, so performance is driven by a contrarian view. Buy the asset everyone loves, and love the assets you own.