NASDAQ Leading the Way Out of Crisis Conditions?

Figure 1 summarizes the bifurcation parameter for the NASDAQ Composite Index. The bifurcation parameter has shown steady improvement and has now risen above the -10% threshold. This suggests that the worst of the mean regressive crisis market may be behind us. While the indicator could fluctuate around current levels and create whipsaw results, the big picture is that there has been steady improvement toward a more efficient market state.


Figure 1. The NASDAQ Index is Becoming Less Mean Regressive

The risk and reward profile of the NASDAQ Index is summarized in Figure 2. The Efficient Market State (-10% < BP < +10%) has exhibited an annualized return of 16% with an annualized volatility of 22%. The prior Bull States (when the BP > 10% and R(0) > 0) show a 60% annualized return with moderate risk. The Bear States (when the BP > 10% and R(0) < 0) show a -30% annualized return with 20% annualized risk.


Figure 2. The NASDAQ Index Risk Reward Profiles

To avoid whip saw trading, look for the Bifurcation Parameter to become positive before changing positions in the current environment. While the NASDAQ has improved, the Dow Jones Industrial Average and the S&P Composite Index remain in the crisis state.

Hang Seng Index: Trend Persistent (Bull and Bear States)

Figure 1 summarizes the bifurcation parameter for the Hang Seng Index dating back to 1987. During this period there has been very little mean regressive market action. Even recently during the global credit crisis, the Hang Seng did not show the crisis state behavior that the US equity markets exhibited.


Figure 1. The Hang Seng Index has been Trend Persistent

The risk and reward profile of the Hang Seng Index is summarized in Figure 2. The Bull State (when the BP > 10% and R(0) > 0) shows a greater than 50% annualized return with moderate risk. The Bear State (when the BP > 10% and R(0) < 0) shows a -20% annualized return with 32% annualized risk.


Figure 2. The Hang Seng Index Risk Reward Profiles

A short term trend following strategy would appear to be effective in the current environment.

According to Didier Sornette, et. al.: Chinese Equity Bubble: Ready to Burst

July 10, 2009

Amid the current financial crisis, there has been one equity index beating all others: the Shanghai Composite. Our analysis of this main Chinese equity index shows clear signatures of a bubble build up and we go on to predict its most likely crash date: July 17-27, 2009 (20%/80% quantile confidence interval).