Sep 24, 2020
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How to make money in this market while reducing your risk

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Friday 8. 5 at the Close
Are we heading into another Bear Market? – Relieve your Anxiety; Focus on out-performance via Pair Trading. During the last few weeks being long individual stocks has probably had a negative impact on your portfolio by a margin of anywhere from negative 7% -15%. Dynamically speaking it’s by using the fact; being long stocks on your portfolio has a strong correlation to the Dow Jones and S&P 500 Index in general

 

In other words as the broad markets (Indices) move on a directional basis so do individual stocks as they tend to be swept in the overall wave. How is correlation defined? Correlation is the measure in which how closely two assets relate to each other in terms of direction and cost movement

 

According to this theory you can actually hedge the risk of certain assets by pairing them to uncorrelated sectors within one s portfolio. What does the reduction in correlation ultimately provide? It reduces volatility within one s portfolio and helps alleviate price erosion of your overall capital. That begs the question; how do we make money when the market is either falling or rising? We must identify two assets that not only do not move directly in tandem but in addition enact a long position in one asset class against a brief position in the another non- correlated instrument (simultaneously)

 

Ultimately we are seeking  out performance in one asset class vs. the other. To illustrate we recently published a piece of writing which concentrated on investor s preference for Technology rather than the Financial sector. It’s an example of a sector pair trade which seeks outperformance (alpha) of one sector vs

 

its counterpart. If you initiated this trade by buying the XLK Technology EFT and shorting the XLF Financial ETF (keep in mind both sides of the trade must be initiated and closed simultaneously) just prior to Thursday August 4 2011 you will have made 1% (XLK was down 4. 04% however the XLF was down 5

 

04% for a net return of + 1%). Note; A return of + 1% when the return for the general market was negative 4. 30% within one trading session. PROMOTED Grads of Life BRANDVOICE | Paid Program
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An Important Step To Success For Young People Starts With #WhyApply On September 18 This represents a simplistic trade idea that Long/Short Equity Hedge Funds deploying billions of bucks to the market place utilize on a consistent basis

 

Ultimately it makes no difference toward the general direction of the market (Dow moves down 500 points or rises 500; we are seeking outperformance through two ETF s paired against each other. Chart #1 XLK Technology Sector SPDR (ETF) Chart # 2 XLF Financial SPDR (ETF) 5 Day Price Divergence. We still like the cost action in these two charts above and come Monday want to enter this trade again

 

We are seeking a 2% to 3% divergence from XLK and XLF that will generate a 2% to 3% profit. Be sure to enter both the long and short at the same time and remove them at the same time. Whether the futures are up at the S&P 500 pre open we might execute this trade

 

Remember timing is not that important with a couple trade. All you like to do is identify a strong asset to head long and short the weaker performing one. This is a trade that has worked well for almost two years. If you look at the chart you can see the out performance of technology vs

 

financials. Action to Take:
Long XLK at the $24. 00 to 24. 40 Range
Short XLF at the $13. 50 to $13. 80 Range
We seek for a 2% to 3% gain within a 2 to 5 day time frame. Visit www. thechartlab. com for additional info and your free trial and conference call monday morning before the market open

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