Levy Flight, Truffle Diggers, and Goldman Sachs $GS

Written by Michael Bigger. Follow me on Twitter.

It did not take long after I wrote the post Levy Flight Path in Algorithmic Trading to get a fraud scandal erupting that was worthy of a Levy analysis. The Goldman Sachs (GS) allegations have already attracted  many truffle diggers (journalists and politicians) sending the frequency of Internet news messages to the moon.

Here is what two of the diggers are saying:

• Paul Krugman
• Gordon Brown

This is how we think things will play out using the Levy Flight model:

• GS entered a dense news cluster.
• The cluster will persist for months.
• The cluster will attract more truffle diggers. For that reason, more negative news about GS and other financial companies will surface.
• We expect GS stock to remain under pressure and volatile until the tension is released.
• It might be of interest to short the large dealers if they rally. The Citigroup stock price gap up, which is up after today's earning release, is a good example of this trade. 
• The diggers will eventually get bored and move on to the next story. "This too shall pass". 
• The decrease in the frequency of news messages will be a good indication of when we are about to exit the cluster.
• A trader might want to initiate a long position at that time.

We have decided to add GS to one of our algorithmic trading strategies. We believe GS will be a great trading vehicle for agile traders. We can't wait to see how things play out and whether the Levy Flight model holds its own.

How do you think this will play out? 

Comments

[Arthur]

I was just thinking, nothing can change the fact that Goldman owns Washington and most of us deal with Goldman not because we want to, but we have to. So any negative publicity as you noted will eventually pass and people as greedy as we are will start focusing on how much the firm earns and how efficiently they do it. But, I think it will take a bit of a time, today was the first group of value guys that jumped in to buy, I would wait low 50th. We all can't be right. ( after reading your post carefully I plagiarized it in plain language what you wrote above). :)) Its interesting that your algorithm is actually able to follow the news flow, its technical analysis with a twist.

[Michael Bigger]

Arthur, you got it right. The value guys jump in first. It takes time for a news cluster to disintegrate. There is just to much in there for the media to let it go. Eventually, the media and the readers will get bored and move on to the next story. This won't happen quickly though. Low 50th is very possible. Thanks for your input.

[Aris]

I'd like to learn more about this levy flight model. And your blog illustrates it well. It would be great to include the BP oil disaster in this model right after the GS fraud allegations, perhaps much more 'clustered' than GS.

Aris

[Michael Bigger]

Aris,

You are absolutely right about BP. It is a Levy Flight news cluster in my opinion. Just listening to Twitter, you can see the frequency of messages abating.