Figaro
October 23, 2018·5 comments·three body alpha
Trend-following strategies work. The empirical evidence is clear. But they work for reasons investors find uncomfortable to admit, and that discomfort masks a deeper problem: the music that makes the price dance isn't what you think it is. When the stories people tell about a company change, the trend often breaks months before the price does. Investors watching charts miss the warning entirely.
• The stability of a narrative matters more than the direction of the price. A stock can rise while the stories connecting its future to its present are falling apart. Investors won't feel it in the sentiment. They'll only see it later in the chart.
• When a company loses control of its own story, the narrative fractures into competing pieces. Positive elements that used to exist together in one coherent narrative become isolated. Negative elements that used to live on the periphery start connecting to the core.
• This narrative breakdown happens before the price responds. You can watch it occur in real time through how journalists and analysts link ideas together. The shift looks small because sentiment might even stay optimistic. But the structure has already broken.
• Trend-followers relying on price alone miss the signal until it's too late. By the time charts show the reversal, the narrative has been unstable for months. The music changed before the dancers stumbled.
• If you want to understand whether a trend will hold, you need to ask a different question than whether prices are rising. You need to know whether the stories holding that trend together are still coherent. That's a harder skill, but it might be the one that separates winners from everyone else.
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This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
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Comments
I’m sorry but my mind is blown. I want to try to be smart and respond intelligently but this was great. I’ve been following Tesla for quite some time now and have been able to make some money off of understanding the metagame. But the metagame was so well articulated in this article. I need to take a break go through a second read. Thanks for providing such deep insight.
Rusty outdid himself with this one. It’s the best thing I’ve read on Momentum/Trend-following strategies in a really long time AND it’s a phenomenal application of narrative analysis.
I’m curious if we are now in Act IV: Profitable Tesla. We’ll see if the bulls have retaken control of the narrative with Citron’s flip from a short to a buy and today’s Q3 earnings report. The news flow on TSLA is the most weaponized on any public company I have ever seen.
That’s a good way of putting it.
Great piece Rusty! For a new entrepreneur, it takes a lot of courage to recommend other resources that might take eyeballs off you. Very clear eyes and full hearted of you.
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