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

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

 

Putting It Together

For the past ten years or so I have been putting out a blog on my websites: swingtrader.com, relativevalue.com, and perfectstormtradingstrategy.com.

During that time I have proposed looking at the investing/trading world through a different lens, focusing on relative strength combined with absolute momentum.

Since I started my blogs, I noticed others promoting similar strategies.

A book was written a year ago highlighting some of my thoughts and a global advisory established counseling many of the worlds largest money managers, using many of the tools that I had developed.

Most studies of actively managed funds tell us that only four percent of money managers can outperform, on a risk adjusted basis, the Dow or the S&P 500 averages over a ten year period.

I believe that most, if not all of the poor performance is a result of two factors.

One) The inability of the manager to sell positions that are in decline because of the requirements that the manager has to be fully invested. That is, there is no viable alternative, so the manager stays invested, even in losing positions.

Two) The behavioral problem in admitting that you are wrong. The reason for the initial purchase is no longer valid. Not that you were wrong then, but you are wrong now. It has happened to all of us.

My strategy/system remedies both of these problems.

If you are an investor in equities, commodities, foreign exchange, long term, short term, or day trader, if interested in adding significant value to your investing/and or trading portfolio, please contact me at:

rfeit@msn.com