On the plus side, we did forecast that the overall direction of global equity markets in October (end of Sep 25 to end of Oct 26) would be negative. Got that right! If you were short global equities, you’ve done very well.
On the minus side, we did not forecast the large magnitude of the decline (-9.1% across all 56 MSCI markets by end of trading today). Our individual country calls—while pretty good relative to total global direction—were also incorrect.
Explanation? Our GEF model is still in R&D mode, and as such we are still running our model totally out of sample: In other words, we have not rebuilt our model since last December. We’ve been doing this to save computing time and also to gain confidence that the model is not overfitted. We wanted to see if it ran well each month on entirely new data. It did work very well from January through August. It worked a bit less well in September. It worked poorly this month. We’re probably finding out about how long the GEF can run reliably out of sample. (Answer: about seven months.)
Clearly in a real-world, money-is-at-stake projection scenario, we would be rebuilding our model every month—and thereby incorporating into it every new twist in trading strategy and every new tilt in market bias.
Fortunately, we’re taking steps to address this limitation. We’ve just undertaken a big leap in computation speed that will enable us both to rebuild our model monthly and to recreate our historical modeling process through multiple iterative runs. This will give us terrific confidence in how the GEF is likely to perform every time it encounters a new month. At the same time, we are continuing to add and refine variables. When we introduced GEF back in August, we announced our RSQ was reaching just over 0.5 for individual countries. We expect soon to be able to get well over 0.6.
Completing all of the above will take about six weeks. So we are going to take GEF offline for the next two months. We will be back starting about two months from now (we’re tentatively planning on December 26, end of day). Please stay tuned and rejoin us then.
