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Article Title:
The Non-Random Walk Theory - Persistency

Article Description:
Non-Random price behavior is not a myth.  It exists and if you 
are not exploiting it you should be.  Here is a closer look...

Additional Article Information:
996 Words; formatted to 65 Characters per Line
Distribution Date and Time: Fri Mar 24 03:34:30 EST 2006

Written By:     Damian Campbell
Copyright:      2006
Contact Email:  mailto:[EMAIL PROTECTED]

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The Non-Random Walk Theory - Persistency
Copyright © 2006 Damian Campbell
CET Capital

Non-Random price behavior is not a myth.  It exists and if you 
are not exploiting it you should be.  Here is a closer look...

The CET Capital investment strategies aim to exploit persistent 
price behavior of the small cap stock indices and mutual funds. 
While some of CET Capitals' methodologies are proprietary, 
exploiting persistent price behavior; which is the foundation of 
what we do is not. Persistency, as defined by Gil Blake, is a 
combination of volatility and historical reliability. Below I 
will summarize an interview in Jack Schwagers' book, The New 
Market Wizards, which eloquently describes how in the 1980's 
a successful money manager named Gil Blake capitalized on 
persistency.  My aim is to demonstrate two ways of identifying 
non-random, persistent price behavior. The first will describe 
non-random price behavior in terms of probability. The second 
will show persistency in terms of compounded annual return and 
drawdown.  My goal is to convince you that exploitable persistent 
trends have existed as far back as your grandparents can remember 
and they exist today. Simply put, you should be invested with a 
manager who exploits these trends.

The History of Persistency.

Gil Blake was one of the first money managers to exploit non-
random price behavior and talk about it.  Below is a summary of 
his interview from Jack Schwagers' book The New Market Wizards. 
The chapter is called "Gil Blake: The Master of Consistency".

Gil Blake was a mutual fund timer who was able to achieve gains 
of over 20 percent per year.  Blake's life changed in the early 
1980's when a friend presented him with evidence of non-random 
market behavior.  When choosing which mutual funds to trade he 
"would rank each sector based on a combination of volatility and 
historical reliability, which he called persistency". He became 
so confident in monetizing these persistent trends that he took 
out four successive mortgages on his house over a three year 
period so he could invest more money in his strategy. When he 
started to examine managed sector funds he was amazed "that the 
daily average price change in a given sector had anywhere between 
a 70 percent to 82 percent chance of being followed by a move in 
the same direction the following day." One of the things that 
Blake said was, "If the odds are 70 percent in your favor and you 
make fifty trades, it's very difficult to have a down year".  His 
high trading frequency eventually got him banned from Fidelity 
and was also a large influence on the introduction of what are 
now known in the mutual fund industry as early redemption fees. 
His successes were also a tremendous influence on CET Capital.  I 
want to note here that with the introduction of high beta inverse 
mutual funds from fund families like ProFunds and Potomac hedging 
can be used instead of selling.  As of March 2006 CET Capital is 
trading a short term strategy which incorporates hedging instead 
of selling, therefore actively trading these managed mutual funds 
is now once again possible.

Analyzing Persistency

A more familiar way of looking at "Persistency of Price" (POP) is 
to think of it in terms of "winning streaks". Below POP is shown 
for consecutive up days ranging from two days (POP2) to six days 
(POP6) for three of the major US indices.

  [image: ]
  [image subtext:]
  Start date of analysis: September 9, 1988. End date of the 
  analysis: December 30, 2005.  Statistics were compiled using 
  FastTools analysis software and FastTrack data.

Simply put the Russell 2000 is the most persistent index in this 
group.  An up close has a 62 percent chance of being followed by 
an up close in the same direction the following day (POP2), while 
the probability of having three up closes in a row is 39 percent 
(POP3).  Like Blake, I look at it is like this, if you are 
trading something that has a 62 percent probability of closing up 
tomorrow if today is an up day and you are making between forty 
and sixty trades per year it will be difficult to have a down 

Therefore if you simply buy on an up close and sell on a down 
close in the long run you capture the heart of the price move and 
beat buy and hold.  Below there are two sets of charts which 
compare trading for persistency vs. using the buy and hold 
approach of the respective index from its inception.  The top 
group of charts is thumbnails and will open to bigger charts if 
you click on them. These charts represent the simulated 
compounded growth of a $1000 using the above simulation rules for 
the S&P 500, NASDAQ 100 and our trading vehicle of choice the 
Russell 2000.  The bottom table takes a closer look at each 
strategies compounded annual return (CAR), maximum drawdown and 
ulcer index (UI).

Trading for Persistency vs. Buy & Hold

Growth of $1000

[image: ]

Russell 2000
[image: ]

S&P 500
[image: ]

A closer look at the statistics behind the strategies.
[image: ]

In each of these examples trading for persistency blows away 
buy & hold. Historically, using this simple approach not only 
increases your compounded annual return it reduced drawdown 
significantly. The point I want to drive home here is short term 
trading for persistency works and it works better on the more 
persistent indices (Russell 2000) then the less persistent 
indices (S&P 500), hence why CET Capital trades the Russell 2000. 
The point is you should have a manager who focuses on persistency 
in your portfolio.

Note:  CET Capital uses this short term trading approach as one 
of our triggers in all of our Short Term strategies. We have 
also identified periods of time in which the markets are more 
persistent.  Our job is to sit on the sidelines when the day to 
day consistency of the market is low and invest when it is high. 
To further capitalize on market persistency we have identified 
the best periods of time in which to use leverage.

Damian Campbell is President and head money manager of CET 
Capital, a Registered Investment Advisory firm. He oversees the 
testing and execution of all CET Capital investment programs. 
Low Minimum, Low Management Fee, Small Cap Focused, No Leverage. 
Please visit us on the web at or call.



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