ETF Status June 7, 2010

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  • on June 7th, 2010

After publishing some of my ETF data last week, it was obvious I needed clearer disclosure of my tactical use of the results.  This is still just a brief snapshot of the results, but I’ve added a few columns that keep me from rushing into entries and exits.  I believe this mean reversion filter adds a layer of psychological and financial cover by ensuring that we are considering the potential range of prices rather than just blindly chasing trend.

Here is this week’s snapshot, with an idea of tactics below:

Much of this graphic is the same, with the following clarifications after talking to viewers of the data:

1) This is not a watchlist for Monday mornings.  In fact, I rarely make new entries on a Monday…if anything, I trim existing positions if news causes an extreme move in my favor.  The timeframe for the graphic above is weeks and months, not days.

2) I track correlation to recognize when my positions are essentially the same trade.  For example,  Materials and Australia and Aussie Dollar are all short candidates, but being highly correlated they are not diversified.  Being short all of them is like being short 3X the size of each idea…not necessary.  Ideally, we find candidates that show some independence with correlations between .50 and -50.

3) I trade long and short equities without a bias either way, but am a little more discriminating with short asset classes.  Since this is based on longer-term timeframes, the historical trend of assets rising works against holding a long-term portfolio of shorts.  My compensation is to consider long candidates at the +50% threshold, but shorts require a -75% figure.

4) I’ve added the “value” columns on the far right to keep from getting seduced into chasing a trend.  Even the strongest trends pause to shake out weak holders, so it’s best for us to join the trend when trend is strong and reward outweighs risk.  These are not based on fundamental research, but simply deviations from shorter-term periods such as the 10 week moving average.  I consider this a form of defense to offset the nature of trend following as a form of offense.

5) We start running these screens on Friday afternoon in order to make any adjustments that we hadn’t made during the week.  We give ourselves discretion to enter and exit if our timing instinct converges with the quant signals, but by Friday’s close we hand it over to the models to clean up any work we haven’t done.  We think this combo of discretionary and systematic approaches allows us to take advantage of early and midweek moves but not force our opinion on the markets.

Based on Friday’s closing prices, I don’t see much in the way of compelling opportunity in these asset classes.  With the exception of Corporate Bonds(LQD), the buy candidates are all closer to reward targets than support levels.  On the short side, Friday’s downdraft stretched prices far enough to make shorts a no-entry zone awaiting higher levels.  Further weakness could actually prompt us to cover some shorts by reducing short delta, so we’re more on guard for that than any entry opportunities.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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