The Objective System

Money management systems have existed since the time markets were created. It was a natural step to harness and comprehend the market. The market universe always had numerous elements and the system selected a few of these. It was always like the study of a small sample.
As early as 1800, it was the candlestick charting system at the Osaka rice exchange. The 1850s saw bookkeeping come in vogue and fundamental systems were created on the basis of analysing new information (news), valuing the asset and observing the divergence of value from price. Technical analysis indicator systems of 1884 assumed that the price discounted all information. The use of modern computers brought probability theory and Gaussian curves to the mainstream.
Systems will always give a telescopic view to look at the universe, a piece at a time. We can only estimate the big picture, never actually see it. In such a limitation, systems should be viewed as risk-reducing ideas rather than return-increasing approaches. David Aronson’s book on evidence-based technical analysis quotes an example of excessive searching. While searching for the best predictive correlation to the S&P500, the UN database suggested the level of butter production in Bangladesh had a correlation of 0.7 with the S&P500. The more you search, the more correlation you can find — of everything with anything.
Systems can also be viewed as an approach to identify opportunities that stand out and have real merit. Aronson talks about real merit opportunities as a skilled musician, a real talent, which would stand out of his group. Real skill is like a real asset that stands out in performance from the rest of peers. Because the market universe is large, market participants adopt various systems.
Some system ideas get popular and some remain peripheral. Seasonality as a system is adopted by the minority. It’s only for the value pickers and for contrarians, who have longer holding periods. Seasonality as a multi-week, multi-month trading is a novel approach. Performance cycles and numeric ranking are our objective system, which is built around seasonality for a group of assets. Performance cycles also seek outliers, but bet against them. The top outliers, the best performers, are a ‘reduce’ for us, as they are the most expensive. And, the worst outliers are the value accumulate and buys for us, as they are inexpensive. This idea of seasonality in performance works irrespective of whether one is investing for a few minutes or a few years.
HDFC Bank, Bank of Baroda, Tata Motors and TCS are the top outliers for a multi-month period and, hence, the best reduce for us. The oversold worst rankers — Punj Lloyd, Housing Development, Reliance Infra, Reliance Power, Sesa Goa, NTPC — are the best value picks for us. Nifty, at 26 percentile, is also near-worst performance. With Daily momentum readings oversold still, minor multi-day positivity on the index cannot be ruled out. On the higher side, we are not looking Nifty above 5,800 now. March is known for reversals and would need a review.
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