One approach to trading the market without taking on large risk is to establish a position that is market neutral. For example, the spread plot above shows the ratio of QQQQ to SPY (red line). QQQQ and SPY are significantly correlated most of the time so we have a somewhat market neutral position if we buy QQQQ and short SPY. (In the event of a market crash we should not lose too much.) The spread plot shows that the QQQQ/SPY ratio bottomed out in December 2008, and QQQQ has been significantly been outperforming SPY thus far in 2009. Take a look at the second plot above. SPY is down about 22% this year while QQQQ is only down 10%. We could have made 12% so far this year by buying QQQQ and shorting SPY. Not as good as making 22% just shorting SPY, but we could have made the 12% without being fully exposed to the risk of a market meltdown or melt-up.
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