High Volatility versus Low Volatility

There is a fascinating article in today’s Wall Street Journal in its quarterly “Investing In Funds & ETFs on page R3.: The Time to High-Beta?

Once a Quarter.

The thesis is that new research conducted says that: “high -beta stocks tend to outperform in just one week per quarter. Only in that week, therefore, does it make sense that traders bet on high-beta stocks. That week occurs in the quarterly earnings season.

The article goes on to that to test the theory, one would invest, during the first week of earnings season in a high-beta stock ETF while shorting an equal dollar amount of a low ETF.

Their example in the article regarding a high-beta fund is the Invesco High Beta ETF. (SPHV) That ETF  contains the 100 highest beta stocks of the S&P 500 index. The 100 selected have the “highest sensitivity to market movements, or beta, over the past 12 months. The fund and the index are rebalanced and reconstituted quarterly in February, May, August, and November.”

The example of low beta is the Invesco S&P Low Volatility ETF(SPLV) which contains 100 S&P 500 stocks with the lowest realized volatility over the past 12 months. It then weighs each stock based on its volatility(well, lack thereof).

I assume it is rebalanced every month, but was unable to speak to anyone at Invesco to give me that information.

The article begs the question of whether a strategy of ALWAYS having a position in being long/short SPHV versus the reverse in SPLV would be successful?

The following illustration says YES!

The green vertical lines indicate long SPHB and short SPLV. The red vertical lines indicate long SPLV and short SPHB.

 

Swingtrader Suite for Day Trading

Many times I have been asked if the PerfectStorm strategy that works so well for swing trading has any use for the thousands of traders who day trade. Perhaps the following illustrations will be helpful. All graphs are as of the close of business of Friday, June 5, 2020.

The above picture is the daily results of BA versus SPY.

The top is BA, and the next security is SPY. The next line represents the relative strength of BA versus SPY. When the line is going up and GREEN, BA is stronger than SPY. When the line is going down and RED, SPY is stronger than BA.

The Vertical lines represent, when GREEN, that BA should be bought. When the vertical line is BLUE, the trade should be closed. When the vertical line is RED, BA should be short. Many hedge funds, when the trade indicates, will be short the opposite security, that is, when indicated long BA, they will be short SPY and vice versa.

 

The next picture is of BA versus SPY on a twenty-minute basis. I have left off the vertical signal lines, but a careful analysis will dictate the long/short position.

The next picture is of BA versus SPY on a two-minute chart.

There are thousands of “pairs” that can be traded in the same manner. Just ask Medallion Fund, or Citadel, or World Quant or the many other Quant funds.

I can be reached for further information at rfeit@msn.com or (516) 902-7402

PerfectStorm Indicators

As mentioned in many of my posts, I have found a method of determining if an asset is rising in price, or falling in price.

The following pictures as of the close of March 4, 2020, should illustrate a partial solution.

It is of Exxon Mobile (XOM) a widely held multinational oil company that is part of the Dow Jones Industrial Average.

The Covid 19 virus has affected many parts of the economy. The price of crude oil has been reduced. As the world economy

has slowed, the demand for crude has also been reduced.

 

There are two pictures. One is of the daily price of XOM by itself. The other is of XOM as compared to the S&P 500 on a relative performance basis.

Versus the S&P 500

The red vertical lines represent a sell decision, a blue vertical line is a pause, a red vertical line is a purchase.

You will notice that since October of 2019, XOM has underperformed the S&P 500.

 

Why most money managers cannot beat the market, Part ONE

Some years ago, in 1988, I was asked by my friend Paul Singer of Elliot Associates, to represent the convertible arbitrage practitioners at an annual Convertible Securities conference in New York. Paul had been the speaker the year before and advised me to keep the dialogue going with the large convertible fund managers such as the many mutual funds that had increased as convertible securities became popular as a separate asset class. Paul and I had spoken many times as Cohen Feit and Elliot were one of the few funds that specialized in convertible arbitrage. We met often at lunch’s sponsored by investment bankers to promote new issues of convertible securities.

At the conference, I spoke about my firm, Cohen Feit and how we allocated capital between the various strategies we employed. I then delved into one of my pet peeves about the new, non-traditional convertible issues that were being promoted by the various bankers on behalf of their clients, the corporate issuers. I was very much against the issues that were oftentimes so complex that I just stopped looking at them at all. I complained to the audience that perhaps they should do the same. Just say NO. Hands raised and I called on one of the largest mutual funds managers in attendance. His response was echoed by many others. He had to buy almost anything that came out because his fund was growing and, wait for it… he had to almost fully invested at all times. He did not have my luxury of just saying no. He would have been penalized by his parent managing company for not being at last 95% invested at all times in various convertible securities. All of the other funds in the parent companies’ family of funds had the same requirement. Full investment. Never mind the market condition, stay invested.

The result, when the crash occurred the previous year, they had to lose. They had forgotten Warren Buffett’s famous saying: “Only when the tide goes out do you discover who’s been swimming naked.”

So, reason one on why most if not all managers cannot beat the market: They have to be fully invested. Even the index funds contain the good, the bad and the ugly.

Overall Market Signal

The following chart of the ES Future which represents the S&P 500 index clearly shows that the U.S. equity market, as measured by the S&P 500 index clearly showed a negative daily bias starting at the close of October 4, 2018.

The ES has started to recover in 2019.

For more information on how this kind of quantitative approach can help you with your investment goals, please contact me at rfeit@msn.com or by phone at 516-902-7402.  Also, look at www.medallionreasearch.com for more information.

Prices are as of 8 AM, July 11, 2019

Daily

 

 

Alibaba

According to Bloomberg on May 28, 2019 “Alibaba Group Holding LTD. is considering raising $20 billion via a secondary listing in Hong Kong after a record breaking 2014 New York debut, people with knowledge said, a mega-deal that will bring China’s larger company closer to friendlier investors at home as U.S. tensions escalate.”

If this occurs, trading hours will expand to over 20 hours 5 1/2 days a week.

I have attached a daily graph of BABA as of 8 AM today, Thursday, July 11, 2019 below.

 

 

Apple

Apple shares declined on news that sales of the iPhone were declining because of the downturn of consumer spending in China. Whether you believe that spin or realize that the costs of the new models do not offer a serious reason to upgrade the older phones is of little concern. Whatever the real reason, Apple stock went down.

Apple is one of the most widely held and more importantly one of the more actively traded stocks in the world. Share and options are traded with very small bid-asked spreads.

From a swing trading perspective, the following attached charts should be of some interest.

Daily prices are at 8:00 on Thursday,  July 11 , 2019:

 

 

 

Relative Strength with Momentum

Readers of the swingtrader.com blog will have noticed that the overall theme that I have proposed is that to be a successful swing trader one has to understand the principle of relative strength with positive momentum.

I originally proposed the concept in an e-book that I had offered in 2000. Because of my lack of web marketing, it was only downloaded a few times, although it was free.

Over the past few months, I have received multiple offerings of momentum services that offer similar strategies that I have been discussing on my swingtrader.com, relativevalue.com and perfectstormtradingstrategy.com websites for the past ten years or more.

One of the offers was a service, using only four ETF’s, that the provider stated would constantly beat the market.

Over the next few weeks and months, I am going to have on the swingtrader.com website an example, updated weekly or daily if necessary, of my 4 ETF strategy. If followed, the strategy should emulate the best of the services being offered. It is certainly not a recommendation of what to buy or sell, but an example of what can be accomplished by using a relative strength with momentum strategy. It is for illustrative purposes ONLY!

The four ETF’s chosen are the result of my own research. They should portray a representation of the changes in market sector rotation. The four ETF’s have a positive and negative correlation with each other. The ETF’s are displayed here on daily charts.

I will update the daily charts when appropriate.

Remember, Green=XLE, Energy. Red=XLY, Consumer Discretionary. Light Blue=XLU, Utilities. Yellow=XTN, Transportation.

Latest update July 11, 2019, 8:00 AM

 

 

Dividend Aristocrat strategy

Many traders only look for high probability trades without making sure that there is also a high expectancy outcome.

A great example is so-called Russian roulette. Load a six capacity revolver with five bullets leaving one chamber empty. Spin the revolver mechanism and put the gun to your head. Pull the trigger. The player has an 83% chance of not killing him or herself. High probability, 83% versus 13%, but the 13% is a total loss. Not a few ticks or pennies, but a total loss with no possibility of recovery, ever!

Expectancy knows that regardless of the probability, there is a high level of payout that outweighs the losses.

The successful trader realizes that a system of small probability can be very successful if the average trade has a very high payout for wins versus little loss if the trade doesn’t work out. The best strategy would have a high probability AND a high expectancy.

For example, if one flips a coin a few hundred times and receives $300 each time the coin shows ‘heads’ and loses $100 each time the coin shows ‘tails’, the normal distribution of approximately 50% would earn the coin flipper a high expected return. The coin flipper would have high expected return with anything better than a 25% heads versus tails distribution.

An example of a high probability, high expectancy swing trader strategy is derived from an article in Seeking Alpha, December 23, 2016, “The 10 Best Dividend Aristocrats for 2017 And Beyond”. The piece refers to 10 stocks from a wide range of industries which have increased their dividends for at least 25 consecutive years. “Market Watch” reported on September 9, 2016, that Dividend Aristocrats stocks almost doubled the returns of the S&P stocks in 2016. Many other studies of dividend aristocrats show similar results over much longer time periods.

Below are the 10 Dividend Aristocrats mentioned in the Seeking Alpha article. Once again, the relative momentum is color coded to represent the issues that are also color coded.

It is expected that performance will be better if one were to chose only the issues that are exhibiting only positive(above the zero line, purple) momentum.

Higher probability with a higher expected outcome.

VFC=VFC Corp, ABT=Abbott Labs, JNJ=Johnson & Johnson, CAH=Cardinal Health, ABBV=AbbVie.

 

GWW=Grainger , MDT=Metronic, WMT=Walmart, BDX=Becton Dickinson, HRL=Hormel Foods.

 

Color coding on bottom chart refers to the color coding of the securities. Yellow=Yellow, etc.

Prices as of the close May 29, 2019

 

Kraft Heinz

On  (February 22, 2019) Wall Street Journal:

“Kraft Heinz Co. wrote down the value of its Kraft and Oscar Mayer brands by $15.4 billion,

disclosed an investigation by federal securities regulators and slashed its dividend, sending

it’s stock down Thursday more than 20% in after-hours trading.”

 

The following picture of weekly price history, updated at 8:30 today (March 7, 2019) illustrates that anyone

using basic PerfectStorm indicators would have stayed away since July of 2018.