Traders and investors tend to operate in parallel universes, using different analytical toolkits and looking at markets from radically different perspectives. But sometimes there’s common ground. David Varadi’s recent investigation of what he calls error-adjusted momentum (EAM) to normalize returns by way of volatility is an example. Although he’s focused on developing short-term trading signals, EAM serves double duty as a risk measure for monitoring the potential for severe market corrections. That’s of interest to traders, of course, but it’s a topic of import for long-term investors as well. As such, this signal potentially offers valuable intelligence for managing asset allocation over a medium- to long-term horizon via looking for productive times for rebalancing.
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