Swing trading using pairs, Emerging versus Frontier Markets

A recent Wall Street Journal article, Saturday/Sunday February 1-2, 2014,tracked the relative performance of ETF’s representing emerging markets and even less developed economies referred to as ‘frontier markets’. The article points out that the frontier markets have seen a ‘steady trickle of investment from fund managers hoping to ride years of steady growth’.

I have used the ETF IEMG to represent emerging markets and the ETF FM to represent frontier markets.

Since the end of 2013, IEMG is down almost eight per-cent while FM has flat performance. The U.S. market as represented by SPY is down a little more than five per-cent.

As a portfolio manager who is looking to diversify into less developed emerging markets, a look at the relative strengths of IEMG versus FM would be of some value.

The following graph illustrates this point.

 

Pairs IEMG-FM 1-31-

Pairs trading. VIX versus SPY

One of the groups that are active in LinkedIn is Automated Trading Strategies(Algorithmic Trading of Stocks,…). A current questions is about the VIX and the SP500.

The VIX, first introduced by the CBOE in 1993 using the S&P100 (OEX) was a weighted measure of the implied volatility of at the money put and call options on the S&P 100. Some years later it was changed and is now based upon the S&P500 index. The ETF of the S&P500 is SPY. The VIX index is often called a fear index by traders because in most cases when the market is calm and moving in a narrow trading range, volatility is low. As the market sells off, anxiety among traders increases and volatility increases. The VIX raises in periods of higher volatility.

The VIX tends to move in an opposite direction as the S&P500.
The following chart of the SPY versus the VIX for the daily period ending January 10, 2014 should illustrate that point.

Pair-SPY-VIX 1-10-2014

The top wriiten symbol in green is SPY, the bottom security with the symbol written in red is the VIX.
The chart clearly illustrates that as the SPY rises, the VIX declines. As SPY declines, VIX rise.

The vertical lines indicate turning points in the direction of the SPY and the VIX. Green lines tell the trader to purchase SPY, the symbol written in green and sell VIX, the symbol written in red. Red vertical lines indicate the decision to purchase VIX the red symbol and sell SPY the green symbol.

The latest trading decision was indicated on October 16, 2013. Buy SPY, sell VIX.
If a trader had purchased SPY the next day at the high of 173.32 and held it through the close of 184.14 on January 10, 2013,it would represent a profit of 6.24%. A sale of VIX at the low of the next trading day after October 16 at 52 and still holding the sale through the close of 40.84 on January 10, 2014 would represent a 27.3% profit.

Pairs Trade: Target versus Walmart

On Thursday, December 19, 2013, Target(TGT) confirmed that someone had hacked onto its systems and had stolen 40 million debit and credit cards from stores across the country. The breach lasted from Black Friday, November 29, 2013 to Sunday December 15, 2013.

Target(TGT) has generally been ‘paired’ with Walmart(WMT) in many pairs trading strategies.
The following chart shows one such strategy, the Swingtrader method using relative momentum and NOT mean reversion.

Pair-TGT-WMT Dec27-2013

On July 25, 2013 a signal was given and the next day WMT would have been purchased at its high price of 78.03 and TGT would have been sold at its low price of 70.55.

On December 27, 2013 the price at the close was 78.47 for WMT and 62.15 for TGT. A profit on both side of the pairs trade.

Returns would depend on what type of trader you are. It has been our thesis that generous returns are available using Swingtrader based pairs trading.

Precious Metals Pairs Trading

Many investors own some precious metals in their portfolios. Often times the investment is in actual coinage or bars of silver, gold, platinum, or palladium. There are exchange traded funds(ETF’s) that represent physical deposits of the commodity. GLD represents .1 ounce of gold. SLV represents one full ounce of silver. PALL is backed by .1 ounce of Palladium, and PLT is backed by .1 ounce of Platinum. The ETF’s charge a management fee. As a result, the ETF’s track the actual commodity, but do not represent the actual prices.

The Swingtrader philosophy is to trade only when you have an edge. Pairing up some of the commodities and either trading the pair or only trading the component of the pair that is stronger, will lower risk. With the pairs trade, you don’t capture the direction of the prices. you capture the outperformance of one component over the other. With the directional trade, you only go long that component that is in the upswing direction of the pair and is in a stronger upswing than the other.

The following two examples of precious metals pairs should be helpful.

Go long the top security (green) and short the bottom(red) when the vertical line is green.
Go long the bottom security(red) and short the top security(green) when the vertical signal line is red.

A glance at the results achieved with your eye or ruler should illustrate the profitability of the pairs trade.

The first pair is Gold(GLD) (green), Silver(SLV)red

Pair-GLD-SLV Dec132013

The second pair is Platinum(PPLT)green, palladium (PALL) red.

Pair- PPLT-PALL Dec132013

Berkshire Hathaway Versus SPY

BRK.B Vs SPY 12-18-12 to 11-22-13There have been many articles comparing the performance of BRK.B (Berkshire Hathaway B) with other investments. Many such articles refer to the SPY exchange traded fund(ETF) which mirrors the value of the Standard & Poor 500 index. At times BRK.B outperforms the SPY and at other times the SPY outperforms BRK.B. Over long time horizons, BRK.B has been the better investment.

As of June 12, 2012, the six-month correlation of BRK.B was .96 with the S&P 500 (source: Bespoke Investment Group) as reported in the WSJ. 1.0 being perfectly correlated and -1 most inversely correlated.

Using some of the PerfectStorm pairs indicators, I designed a simple strategy to take advantage of this correlation and the indicators dictated which of the two securities to be long at any given time. Another use would be to be short the other security in a pure pairs play.

Red double lines on the bottom  part of the chart dictates to be long the red security SPY. Green double lines to be long the green security BRK.B.

I started the exercise on December 18th 2012 and ended it on Friday November 22, 2013. I purchased the security the day after the signal at the high of the day and sold it on the day after the indicator changed direction at the low of that day. Examples of shorts were on the low for initiation and the high for the cover. The long only trade generated an absolute return of 34 %. The pair trade, long the stronger security and short the weak security, showed an absolute return of 15% over the same period.

 

 

 

Swing Trading TBT versus SPY October 16, 2013

In todays market environment, the talks between The White House, Senate, and The House of Representatives, two ETF’s are reacting to most every announcement of success and/or failure of negotiations.

The SPY ETF represents the S&P 500 index. The S&P , according to the ‘talking heads’ will rise once the Debt limit talks lead to an increase in the National Debt limit. The same commentators also believe that the S&P will decline if the Debt Limit talks lead to some kind of so called default in our payments.

At the same time, if the Debt limit is not increased and the U.S. Treasury is forced to make choices in payments and a default in payments is somehow imminent, interest rates are, according to the same ‘talking heads’ will rise. If rates increase, then TBT, the Pro Shares Ultra Short 20+ Treasury will increase in value.

The ultimate pair to day trade, as news ebbs and flows is the TPT-SPY pair.

They should fluctuate in opposite directions.

The following chart of the 3 minute price action of the pair should be of illustrative value.

TBT-SPY 3 Minute 10-16-13