Update on XLY, XLP vs SPY

 

What a difference a few days make.

Prices as of the close on Thursday, January 12, 2023.

 

Hedge against bond market decline

During the 1998 stock market decline of 21%, I was a managing partner of two convertible arbitrage hedge funds. It should have been a home run for the convertible arbitrage community, but there was also a decline in the fixed income market that happened at the same time.

The long side in the convertible arbitrage position is supposed to decline at a much slower rate than the short side equity decline.  That is where the profit comes from. In 1998, as in today’s market, that is not happening. I was not alone. There was a flight from quality, as that was the most liquid part of the market.

This problem led most of the convertible arbitrage community to try and figure out a way to hedge the long side against fixed income decline at the same time as equity declines.

The futures market offered a partial solution, but many of us did not use it because of various reasons. The main reason was that outside counsel advised us that if we were to use futures we had to register as a commodity pool operator with the CFTC, and we were unwilling to put ourselves in another regulatory situation.

TODAY THERE IS A BETTER WAY:

“The Simplify Interest Rate Hedge ETF (PFIX) seeks to hedge interest rate movements arising from rising long-term interest rates and to benefit from market stress when fixed income volatility increases.

T­he fund holds a large position in over-the-counter (OTC) interest rate options intended to provide a direct and transparent convex exposure to large upward moves in interest rates and interest rate volatility.Using OTC derivatives, usually only available to institutional investors, PFIX is designed to be functionally similar to owning a position in long-dated put options on 20-year US Treasury bonds. Since the option position is held for an extended period, the ETF provides a simple and transparent interest rate hedge.”

For more information, go to the Simplify website.

The following graph portrays PFIX in relation to SPY, the ETF of the S&P 500. Close as of the close of Tuesday, September 27, 2022.

The swap from SPY to PFIX is at the Green vertical lines.

The trade would make an interesting momemtum-based pairs trade.

 

 

 

SHW revisited. Swing Trading at its best.

As many of my readers know, I have been following Sherwin Williams for many years. It qualifies in most metrics as a solid company financially and has been an outstanding holding in many portfolios.

The caveat is that if you have the ability to adjust your potfolio when certain stocks are not gaining at price but declining, then SHW has been in and out of your portfolio many times in the past few years.

Using the weekly price action as the guide and the daily price action as your trigger, the following charts are a good example of good timing in SHW.

As usual, green lines represent the time of being long on the weekly, if only the daily agrees.

 

Long-only from April of 2020 until the end of January 2021. Then long-only from April of 2021 until Mid January 2022. Short only from February 11, 2022.

The daily charts are the actual trade trigger.

 

This is an example of how swing trading is supposed to work. Prices are as of the close on Friday, March 11, 2022.

Another PerfectStorm example COST

The following is another example of waiting for the long-term signal, in this case weekly. When that signal is LONG, then if and when the shorter-term time frame is also LONG, jump aboard.

The signal in COST from April 9, 2021, has been LONG only. A corresponding LONG signal was signaled on June 23 and the next day COST opened at 393. A close signal was signaled on September 20, and the opening the next day was 456. Approximately a 16% return in about 3 months.

Please refer to my previous post on REGN for more detail.

 

Houston, We Have A Problem : GameStop

The recent movement in GME (GameStop) has been headline news in almost every financial newspaper and as the lead story on almost every network and cable news channel in the last week.

Whether by individual investors acting through chat rooms or multi-strategy hedge funds acting individually or in concert, or investor trading platforms or clearing and pay for order flow firms, they ALL should have realized that tracking momentum would have prevented the large losses, if short, and given hope to the long side traders.

The four pictures below show the story. The linear scale has been changed to Semi-log for better illustration.

The last sale is as of the close of Friday, January 29, 2021.

Green is GO LONG, Blue is the close position, Red goes short.

Weekly:

Daily:

720 Minutes:

130 Minutes:

It is pretty obvious that only LONG positions should have been established starting the week after September 18, 2020, based on the weekly close. LONG-only once again after December 22, 2020. And so on with the 720 minutes after January 12, 2021, and LONG only after January 13, 2021. with the 130 minute picture.

It makes no sense looking at the above pictures of the trading history of GME over the last few weeks to understand how anyone with a plan would make try to profit from the short side of GME in the last few weeks.

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