Half Pair Trading

The Half Pair/Unilateral Pairs Trading concept, described in James Altucher's book 'Trade Like A Hedge Fund', has a lot of potential. The basic idea is to find highly correlated pairs of stocks that could be used in a pairs trade, but only trade the more volatile stock of the pair. The stock is traded when the ratio of the two stocks of the pair reaches an extreme.

The first plot above shows the results for trading IWM based on the IWM/SPY ratio. The equity curve has much less adversity than just buying and holding IWM. The second plot shows the results for trading KLAC based on the KLAC/NVLS ratio. The increased volatility of individual stocks verses ETFs makes for increased potential profits. However, note that nothing much has happened with the KLAC/NVLS pair for the last several years. To harness this trading approach, it will be necessary to find a sufficient number of highly correlated pairs that are currently volatile enough to examine further. The approach also would seem to be relatively insensitive to overall market direction.

Time to Confront the Smoke Monster?

The market has plunged in the last month and we are oversold. Is it time to confront the smoke monster and buy?

The T2108 indicator is below 15% which has generally marked buying opportunities in the past. The red line on the plots above show when T2108 was below the threshold indicated on the left scale. The first plot shows the past two years and reveals that
T2108 < 20% has usually marked at least an intermediate term bottom. The second plot shows an eight year perspective with the threshold at 15% reducing the number of red lines.

T2108 shows that we have a good buy opportunity now, but caution is advised. Some of the prior opportunities have lead to a lower market in only a few months. See the last two months of 2007 as an example and remember what happened when Mr. Eko confronted the smoke monster.

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Sector Rotation Doing OK

The relative strength sector rotation scheme I described in my 'Sector Rotation' post has performed a little better than SPY over the past year (see second plot above). The first plot shows the results for the sector rotation scheme over the past several years. The Claymore/Zacks Sector Rotation ETF (XRO), described in my 'Sector Rotation Again' post, has done better than my scheme over the past year (see the third plot above).

The sector rotation approach may be a viable means of increasing your return versus SPY, but it will be a rough ride with the continuing market turbulence.

Low Beta/Low R-Squared Not Working

The 20 stock low beta/low R-squared portfolio that I follow has been under performing SPY for the past several months (see first plot above). The portfolio has very good big picture forward looking Monte-Carlo simulation results. The second plot above shows the portfolio excluding three financial stocks. The wipeout in the financials has significantly hurt the portfolio.

Tian Xia

Should some of your real estate allocation be allocated to foreign real estate? The Chinese stock market has plunged this year. Perhaps we should be considering a small allocation to China? Xinyuan Real Estate (XIN) is down more than 50% from its IPO in December 2007 (see chart above).

XIN had positive reviews back in December.

The company website has a nice overview of the company.

Perhaps the earthquake will lead to a move up in the construction companies? (Especially as we head into the Olympics.)

James Altucher briefly makes the case for XIN in a recent article.

Children of the Corn

The grains have made a big move up in recent years. Should we be considering the grains as a place for a bit of our long term asset allocation? Futures Magazine features a story about the grains in its current issue. The carry over stocks of the grains are at historically low levels. China, India, Russia, and South Korea are feeding more cattle and hogs for slaughter. But, wheat has been over planted and the price has pulled back significantly.

Dennis Gartman, at a recent conference, provided insight into the long term trends of various commodities including the grains. He is still recommending the purchase of corn and soybeans. He is counting on the growth of the middle class in China to continue and for an increasing amount of grain to be fed to livestock.

Are the grains still a long term buy at this point? Will the rise of the middle class around the world continue to drive up demand? Will ethanol production in the U.S. continue to consume the U.S. corn surplus?



If you do not have a futures account, you can still access the grain markets via the Powershares DB Agricultural Fund (DBA). The plot above shows the price of DBA over the last year. This fund buys corn, soybeans, wheat, and sugar.

Nice Nasdaq Run

The Nasdaq-100 stocks have had a nice run up since February. The plots above show recent results for the 3x2 System and the Crash System, which each trade Nasdaq-100 stocks. We probably cannot expect the current equity curve slope to continue forward for too much longer?