Book Review: Vitaliy Katsenelson’s Active Value Investing

Active Value Investing by Vitaliy KatsenelsonQuestion: are we in a bull market or bear market? What if there was a third option? In Active Value Investing, Vitaliy Katsenelson makes a case that the current market is actual a "range-bound market" and then gives you the tools to take full advantage of the fact.

What is a Range Bound Market?
Range-bound markets are characterized by their roller-coaster-like volatility and the fact that despite this volatility, money invested in the beginning of the cycle will have close to 0% gains by the end of the cycle. In fact, range-bound markets are more common than bear markets. Katsenelson says:

"…if you look at the U.S. stock market during the entire twentieth century, most of the prolonged (greater than five years) markets were actually bull or range-bound markets. Prolonged bear (declining) markets happened in the past only when high market valuation was coupled with significant economic deterioration, similar to what was going on in Japan from the late 1980s through 2003 or so."

This chart from the book shows the past 107 years bull, bear, and range-bound markets as labeled by Kevin A. Turtle.


Hey everyone,

We are seeing a nice bounce in the markets this morning. The S&P500 is at 1485 as I write this(!!!). If you look at the 5 day chart, you will see this could take us back to part way through the crash we saw last week. The market is saved!

To me, this feels like a dead cat bounce – one formed by a pump in liquidity and a jump in premarket futures.

If You Haven’t Figured It Out Yet, I’m a Confused Trader

Maybe it’s all the green on the screen so far… but already after looking through things a bit more, I a am less bleak than I was earlier. I had commented on Philip John’s last post that after yesterday’s sell-off, I was ready to sell into today’s bounce to move to about 75% cash from 10% cash.

I’ve decided to make no move today. Today is likely to be a nice up-recovery day. I need some time to think things through before selling long-term mutual fund and index positions. And I’m likely to do more damage selling early today than holding too long. Tomorrow would be a different story. We’ll see.

Part of my motivation to sell off so much is that I’m on vacation right now and would like to not have to worry about the market during this volatile time. (Day-traders are on to something with their owning no positions after hours.)

I’m also being very loss averse as after selling my GRMN at $81 (which it has bounced back above after a few shaking trading sessions) I’ve gone ahead an lost about $150 so far on two investments in Amgen (AMGN) and Bed Bath and Beyond (BBBY). I had had those stocks on my list as good value-TA plays that were counter-cyclical to GRMN.

Some New Positions – What am I getting Into To?
AMGN still looks good…


Just a quick note to say I think the market has had its major top.

I am going to wait for a pullback tomorrow (Wednesday 25th July) and have an open order to go short SDS at $51. Hopefully this will get filled in the next day or two.

Watch List Notes for 26JUN07

I’m writing this one directly into the blog, and with any hope it will go up before market open today. Let’s what we have on dee plate. AMGN Notes from late last week: “Stoch sell. MACD still strong. I think this guy is recharging.” I’ve since changed my theory from “recharging” to “dropping”. It’s looking (more…)

AI and Trading

I was reading a blog entry on CPPTrader that was referencing an article from Bloomberg. I am a newbie with respect to trading, but with respect to AI I have been a few times around the block. It was something that I studied in University and have had an attraction to for a long time. I guess I am lazy and would love to write a program that “thinks” for me. As a sidenote I am using AI in my algorithmic trading software, but in a different context.

Avoiding Getting Burnt

Colin brought up the following point:

Christian, it is extremely interesting to read your thoughts on neural nets. I’ve been looking at Neural Nets in a piece of software called Merchant of Venice – . Beyond that, what’s interesting is that as humans, we can look at current day situations and have an innate sense that history is repeating itself, yet there are these outlying situations that break those rules – like Amazon’s recent performance.

How to put that “sense” into code and avoid getting burned by the outliers is the real rub

Stochastics and Multiple Realities

Tom gave a reply that I think deserves more attention. Tom made the following comment to one of my blog entries.

One more thing, if the market is random per the stochastic process and you can’t find patterns in a market where patterns don’t exist, then why do we have trends? A trend is a pattern in my opinion.

If you look at the definition of stochastic process at wikipedia it does not say random as in completely random walk. What the definition is saying is that at each and every point multiple realities can occur.

Is the Model Important?

Tom wrote the following comment:

Christian, great article! I was building an ATS myself but had to put it on the back burner. Do you dabble in neural nets and AI modeling as well? I predominately use YALE, an open source data mining, machine learning software to build currency, futures, and stock models.

This helps me identify emerging market trends and trade (discretionary) accordingly.