Overbought vs. Oversold Mukul Pal, CMT Orpheus Risk Management Indices, UK Overbought or Oversold? RSI (Momentum) Interpretation (30-70) Confirmation, Non Confirmation, Divergence, Failure Mega Overbought (Bullish), Mega Oversold (Bearish) Cardwell’s RSI Reversals (Overreaction) Signal Conflict OB-OB OB-OS OS-OS OS-OB Signal Conflict Framework Trend, Countertrend Momentum, Reversion Overbought, Oversold High Risk, Low Risk Definition Science Statistics Finance Psychology No Marriage What is better, M or R? Are M & R two different strategies, styles of investing? Can we marry M with R? Is M&R analogous to value-growth; low -high beta; small cap - large cap, high book-low book? Can a framework explain the divergence between M&R? How they can M&R be redefined and understood? New approach to signal identification and classification? Could M&R redefine conventional finance, behavioural finance, intermarket analysis? Is M&R framework based on universal rules? Conventional Interpretation Moving Average Crossovers Trendlines Continuation Patterns Oscillators Sentiment Indicators Confirmations Non-Confirmations Why CAPM is not CRAP Montier 1990 Ra=Rf+B(Rm-Rf) Fama and French Ra=Rf+B(Rm-Rf)+ Bs.SMB + Bv.HML+ A VALUE SIZE MOMENTUM BETA DeBondt and Thaler M&R Reversion Momentum Momentum Reversion M&R (Momentum) M&R (Reversion) Dynamic Systems Positive Extreme GROUP 2 AVERAGE Positive Extreme UNIVERSAL AVERAGE Negative Extreme Positive Extreme GROUP 3 AVERAGE GROUP 1 AVERAGE Negative Extreme Negative Extreme Universal Systems ORDER ORDER 100 80 60 40 20 0 HERDING RANDOM HERDING Moved DOWN Moved DOWN Moved DOWN Moved UP Moved UP Moved UP BIN PERFORMANCE 0-20; 640 40-60; 780 80-100; 1040 20-40; 180 60-80; 580 Extremes Matter Extremes Matter (CNX MIDCAP) Extremes Matter (CNX MIDCAP) Query 1 Ranking Percentile Performance Valuation Behaviour 0-50 Reversion Undervalued Herding; Order; Random 50-100 Momentum Overvalued Herding; Order; Random 100% 100% OVERVALUED 50% 50% 50% 0% UNDERVALUED 0% Query 2 Ranking Percentile 0-20 20-40 40-60 60-80 80-100 Performance Worst; Reversion Momentum Momentum; Reversion Momentum Best; Reversion Valuation Undervalued Undervalued Correctly Valued Overvalued Overvalued Behaviour Herding Order Random Order Herding 100% 100% MOMENTUM MOMENTUM 75% 50% 50% 25% REVERSION 0% 50% REVERSION 0% WORST, EQUAL, BEST WORST, EQUAL, BEST RMI MIDCAP Outperformance CNX MID CAP 30% 10% Year 2014 ~2004 Outperformance ~2004-2013 6% Outperformance without 2014 Arbitrage*2 RMI RMI VALUE GROWTH RMI RMI (20) (20) EXTREME MOMENTUM 49% 18% 33% 37% 23% 20% 16% 15% 13% 11% 7% 5% 17% 19% 13% 11% 11% 13% 7% 5% 26% 21% 14% 11% RELATIVE PERFORMANCE Average @ 8% Average @ 11% < 30% Portfolio 5 year rolling returns > 70% Portfolio < 30% Portfolio 5 year rolling returns S&P 500 Conclusion M&R are flip sides of each other Value, Size, Momentum, Beta are overlapping factors Risk Preference is everything Markets need a simplified framework for investing Orpheus RMI framework explains M&R Orpheus RMI redefines existing literature Orpheus RMI is based on universal rules Orpheus Risk Management Indices [email protected] United Kingdom (Registered Office) 145-157, St John Street London, Greater London, EC1V 4PW, United Kingdom Phone: +40746919497 [email protected] India Sales Office [email protected] 91-9899108244
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