David Aronson: Re-Education of a Trader

Before the oopsie of 2007, Victor Niederhoffer and his Matador Fund Ltd. won the 2006 MARHedge Annual European Performance Award in the CTA category. I will never forget watching a number of clips on MARHedgeTV where he touted Steve Wisdom’s expertise in “multivariate statistics”, all the while telling the audience that in America, it is tradition to give second chances. It was brilliant.

So you can imagine my amazement this morning when I saw Jeffrey Saut’s investment strategy [PDF]:

According to professor David Aronson, as reprised by Mark Hulbert, “[we used] data from the beginning of 1942 through fall of 2006, and looked at what happens in the stock market in the 60-trading-day period following a . . . Double Nine-To-One signal, versus what happens the rest of the time. In those 60-trading-day windows, the S&P 500 index produced an average annualized return of over 22%, on the assumption that an investor entered the market on the close the day after the Double Nine-To-One signal was triggered and held until the end of the 60th trading day. In the non-signal periods the return averaged 4.5% annualized.” (Full article at Marketwatch)

Professor Aronson? It can’t be the same guy interviewed by Active Trader Magazine in February 2007 [DOWNLOAD PDF]:

David Aronson had studied technical analysis for 40 years and was a true believer. However, his faith in the effectiveness of technical analysis was shaken in the summer of 2000, just after the technology bubble burst.

At the time, Aronson, 61, worked as a proprietary trader for Spear, Leeds, and Kellogg and had been profitable for four years. He used standard technical analysis techniques — interpreting classic chart patterns and standard indicators such as the Relative Strength Index (RSI), which he now describes as “seat-of-the pants analysis.”

After losing money in the first half of 2000, Aronson compared his performance since 1996 to the Nasdaq 100 index and found surprising results.

“My alpha — the difference between my performance and the benchmark — was basically zero,” he says. “I was floating up with the market.”

. . . Combining statistics and the scientific method intrigued Aronson. Although he never formally studied statistics, he hired a tutor and dove into the subject in the summer of 2001. “It was a revelation,” he says. “I saw the connection to the scientific method and thought, this is way technical analysis needs to be approached.”

The interview was conducted to plug his book but something doesn’t add up. His official bio drops names such as Tudor Investment Corporation and makes him out to be a quant rather than someone who practiced voodoo for 40 years. Will the real David Aronson please stand up?

Perhaps I am missing the point. Maybe Wall Street is all about second chances: traders can be rehabilitated in a single summer if they repudiate technical analysis and do time with a statistics tutor. The two-step program apparently worked miracles on Aronson, turning an old market maker into a widely quoted adjunct professor of finance. Amazing.

Oh right, that’s how the Mises “Institute” has done it for years…