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

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

 

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

Berkshire Hathaway Versus SPY

BRK.B Vs SPY 12-18-12 to 11-22-13There have been many articles comparing the performance of BRK.B (Berkshire Hathaway B) with other investments. Many such articles refer to the SPY exchange traded fund(ETF) which mirrors the value of the Standard & Poor 500 index. At times BRK.B outperforms the SPY and at other times the SPY outperforms BRK.B. Over long time horizons, BRK.B has been the better investment.

As of June 12, 2012, the six-month correlation of BRK.B was .96 with the S&P 500 (source: Bespoke Investment Group) as reported in the WSJ. 1.0 being perfectly correlated and -1 most inversely correlated.

Using some of the PerfectStorm pairs indicators, I designed a simple strategy to take advantage of this correlation and the indicators dictated which of the two securities to be long at any given time. Another use would be to be short the other security in a pure pairs play.

Red double lines on the bottom  part of the chart dictates to be long the red security SPY. Green double lines to be long the green security BRK.B.

I started the exercise on December 18th 2012 and ended it on Friday November 22, 2013. I purchased the security the day after the signal at the high of the day and sold it on the day after the indicator changed direction at the low of that day. Examples of shorts were on the low for initiation and the high for the cover. The long only trade generated an absolute return of 34 %. The pair trade, long the stronger security and short the weak security, showed an absolute return of 15% over the same period.