As if any sane person (quants and stats arbitrageurs not included) ever doubted it, intuition does after all have its place among the tools traders can use to make money and more importantly to avoid catastrophic losses. This just in from Dow Jones News:
"Perhaps this is time to adopt a more qualitative approach," Citigroup says in a note titled "Quants Turn Toxic." Firm says "Maybe good old-fashioned human intuition does have something to add in the portfolio construction process." In putting together a simple hedge fund model to assess the current quant predicament, Citi sees things as more a hedge-fund problem than quant issue. Its analysis "emphasizes the vulnerability of hedge funds to the vicious circle of redemptions and margin calls. This can create significant dislocations in markets, as they are forced to precipitously reduce positions."
On a more general note, maybe the blogosphere was a bit unfair to Jim Cramer. For all the total craziness of his "meltdown" two weeks ago ("It's Armageddon out there", "They have no idea", "Call someone", "Bill Poole is shameful, he is shameful", etc....), he wasn't so far off the mark. Two weeks later, the Fed does get the idea that it's just maybe time to do something to avert Armageddon.
Now, will they succeed or are they too late, that's another question, to be answered on your quote monitors over the next few weeks.
It looks like, contrary to what I alluded to in my previous post, the VIX will not break its previous high of 45 reached in 1998 (taking into account the fact that the VIX as we know it did not exist during the 1987 crash when it would have fetched something north of 150). But we did get mighty close. And it's not over....yet. The weekly RSI is not anywhere near giving an all-clear signal. It's still in extreme overbought territory.
This Bloomberg article in the form of a letter from the Hedge Fund guy is an absolute must-read for anyone who wants to have an in-depth understanding of everything that's been going on in the financial markets of late. Peerless.
Excerpt 1: "Currently, all of the portfolios we manage are undergoing a rigorous screening known as ``crossing our fingers and praying that we don't have to try and find a bid in the market.'' This is supplemented by a cross-market statistical analysis originally developed by the U.S. military called ``don't ask, don't tell.'' This ``unmarking-to-unmarket'' procedure has been the benchmark for the hedge-fund industry for the past, ooh, 72 hours."
Excerpt 2: "We are pleased to report that, contrary to what current market prices might suggest, all of our top-rated securities remain absolutely AAA. Provided, that is, the future performance of the underlying collateral is identical to its history. Otherwise, the rating companies say our investments are likely to be reclassified as ``toast.'' "
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