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

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

Pairs Trading Strategy as Proxy for Swing Trading

It should be no surprise to learn that the most successful quantitative hedge fund founders were, at the beginning of their careers, successful convertible arbitrageurs. I was fortunate to be one of the earliest inventors/discoverers of the basic convertible arbitrage strategy.

The basics of convertible arbitrage revolve around the concept of relative value. When the convertible is demonstrably more valuable than the underlying shares, than the convertible arbitrageur purchases the convertible security and shorts the underlying shares. Reversing the trade when the relative values return to normal.

In the early days of the convertible arbitrage strategy, the position carried a positive cash flow and the reversal of the position could take many months until a more favorable opportunity made the position less favorable.

The relative value strategy follows into other quantitative strategies.

Most pairs trading strategies use two securities in the same economic sector that have movements that are highly correlated and co -integrated. They track each other almost perfectly, the ratio of the price of the two such stocks should be almost the same. When their relative movements deviate from their expected behavior, the strategy dictates that the relatively cheaper one be purchased and the more expensive one be sold short. A reversion to the mean relationship. Traders waiting for various deviations, trying to put trades on at maximum deviations. Hundreds if not thousands of pairs traders follow the same highly correlated co-integrated pairs. It becomes a game of chicken. Each trader trying to get the trade on at the best possible time.

Similar to what happened to convertible arbitrage, the returns on the strategy go down as the number of players participating increase. It is a limited universe. The amount of funds devoted to mean reversion pairs trading decreases the amount of profit to be made.

I have developed a swing trading strategy that uses the relative value of the pairs components. Like convertible arbitrage, the strategy uses a large portfolio approach, putting on lots of different positions in differing economic sectors to diversify risk. Many investors may find it useful in a long only portfolio.

Swingtrading for farmers

Corn-Wheat 8-15-2014BTodays(Monday Aug 18, 2014) Wall Street Journal on page C1 has an article “U.S. Farmers Are Up to Ears in Corn”

To no ones surprise, the economic factors that led farmers to plant increasingly more acreage in corn has caused an oversupply of corn just when the demand is declining. This demand fall off is due to a decline in livestock herds and declining purchases from China.

In addition to the supply/demand problem, more farmers in certain parts of the country which have traditional planted wheat have moved to corn due to the changes in weather patterns over the last few years. In other parts of the country, the opposite is happening.

The choice to plant corn or wheat or a new combination of both is happening in farms all over North America.

Fortunately there are ways for farmers to hedge their crops. Traditionally that has been in the futures market.

In September 2011, Teucrium introduced an ETF designed to replicate the returns that mirror the movements in the spot prices of wheat. WEAT. It has developed other commodity ETF’s that follow corn,soybeans and others. The ETF for corn is CORN.  For more information on the construction and costs please go to the Teucrium website.

The following daily chart of CORN versus WEAT illustrates a Swingtrading approach to corn and wheat. Both commodities have been in a decline, but at various times, the better play was to follow the relative momentum. Prices as of the daily close, Friday, August 15,2014

Corn-Wheat 8-15-2014A

and a closer view:

Corn-Wheat 8-15-2014B

For further information on all the topics covered and how you can implement these and many others in your trading plan. Please contact me at rfeit@msn.com See www.relativevalue.com for day trading ideas.

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