Relative Strength

In the many past posts, I have recommended that to be successful in swing trading, one has to be aware of the individual securities relative strength as it compares to some index of its peers.

The following chart is an example of  OIH which is the oil VanEck oil services ETF. I have compared this ETF to SPY, which represents the Standard & Poors 500 index.

 

The prices are as of the close yesterday, January 12, 2021.

The rules are very simple, and the action indicated by the up and down arrows reflects the result of following the rules.

  1. Buy when the target security is stronger, on a relative strength basis than the index.
  2. Buy ONLY when the target is stronger, has positive momentum, and the index is also going up.
  3. Close the position when any condition is violated. Shown by blue vertical lines.
  4. The rules apply to shorting when the actions are the opposite of the buy rules.

Market Timing and Other Examples at Year end 2020

In many past posts, I have tried to illustrate the relative strength of market sectors. The example below is as of year-end 2020.

In my previous post on Market Timing in early December, the illustration below shows that the market trend as portrayed by the ETF “SPY” is still intact. Prices as of the close on December 31, 2020

I am also showing below, another example of relative strength with positive momentum is APPL versus QQQ.

 

The rules in this example are pretty straightforward. Only buy APPL when it is outperforming QQQ AND QQQ is also in an uptrend.

The green arrows show these events. There are many different strategies that can be developed based on these events occurring.

Market Timing Signal

Most investors find that timing the market, which is trying to determine whether to be invested or not, is not something that is within reach.

My experience tells me that not only is it possible, but it is also very important in these volatile times.

The ‘market’ can be illustrated by looking at the performance of the S& P 500 index, which comprises a good section of the United States economy.

The above graph shows the S&P 500 index, ETF: SPY, as of the close on Friday, December 4, 2020. It shows that there was a significant decline beginning at the end of February 2020 with a nice recovery starting in April 2020. It would have been ideal to find some way of getting out of the way of the decline and getting on the right path in April.

There is that kind of early, or at least not so late way, of doing just that!

In the past, which is certainly no predictor of future behavior, the movement of the U.S. Treasury note and bond market, has behaved in an almost opposite manner to the equity market. The avoidance of equity risk has shifted the money flow into the safe haven of U.S. Treasuries and vice versa. In the past then, the equity market has been negatively correlated to the Treasury market. So, when equities are getting strong, Treasuries should be getting weaker, etc.

I have chosen an ETF which is a good indicator of the U.S Treasury market: EDV, the Vanguard Extended Duration Treasury ETF.

Prices reflect the close of December 4, 2020.

 

The following chart shows the relationship between the price movement of SPY and EDV during the period of February 2020t to the close of Friday, December 4, 2020.

SPY is represented by the green line and EDV is represented by the red line in section three of the graph.

The next line shows the relative strength of SPY versus EDV. Green shows that SPY is stronger, Red shows that it is weaker.

The same is true on the bottom part of the illustration. The cross indicator on the individual ETFs show positive or negative momentum of the individual ETF.

 

The answer then is that one could make a market timing decision by watching the relative strength between equities (SPY) and Treasuries (EDV) and act accordingly. Purchase the equity market when it is in a positive relative strength to the Treasury market, which is represented by the Green vertical lines. Stay on the sidelines when it appears that the Treasury market is stronger than the equity market, the Red lines.

 

 

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: