SDS-SSO Model Update - May 27, 2009

Dear Blogger, thank you! again for subscribing to the S&P 500 long/short ETF Model and welcome to new members who just joined and new list subscribers. today's analysis is available for download: SDS-vs-SSO-20090527_subscriber.xls.zip - (or feel free to browse the directory.) ignore the missing data error message that may pop-up when opening up the file. Excel for Windows looks for metadata that Excel for Mac doesn't generate. if you ever misplace your login, send me a message using the email you originally provided when subscribing through paypal. visit the blog for an archive of all subscriber updates and alerts. the archive is search-able and comments can be posted by everybody. Today's Commentary today's market action was indicative of "return of the jitters." why today beats me except the S&P 500 is up nearly 40% from the Mar-2009 lows. there's no rational right now in the market - has been in this condition for quite some time. fundamentals and reasoning has gone out the window like a puff of smoke. both optimization algorithms are pointing to lower price action on the S&P 500. since reason is out the window, don't be surprised if the index rallies tomorrow or repeats last weeks and this weeks behavior thus far. remember, the model is not predictive. it is adaptive like a vehicle suspension system. the tuning charts are showing the model is adapting to changes in market conditions like the suspension system changes to road conditions. without getting too technical, the model is passively adaptive as opposed to actively adaptive. active control systems anticipate changes in the system before they happen and prepares to make adjustments to stabilize the system in advance. active control systems have active elements in the system such as motors, hydraulics, pneumatics, fans and such that add energy to stablize the system. whereas springs, dampers and masses are passive which means they only transfer energy from one form to another. when metal bends, energy is converted to heat &/or stain energy if the metal is permanently deformed for example. one way i get a feel for how the model is adjusting to changes in the S&P 500 index is through looking at the quantity i have defined vector c. as you might have guested, vector c is a resultant of adding two other vectors at right angles to each other. the other two vectors are the neutral weights of each ETF. using the Pythagorean theorem, i compute the magnitude of vector c. vector c gets distorted when there is uneven rates of change of each ETF. these distortions typical occur during rapid changes in the neutral weights to maintain equilibrium - equilibrium being the neutral pair value, consisting of SDS & SSO in our model, does not change. as the sides of the triangle change in length, the resultant vector changes in length and angle. that angle is the arctangent of the 2 sides of the triangle. under normal trading conditions, theta is 45 degrees. i subtract theta from 45 degrees and get a picture of when SDS is changing faster than SSO for instance. i also compute the % rate of change of magnitude of vector c and i now have a complete picture and set of parameters to determine when it's time to re-balance and re-bias the portfolios. this is addition to the PID optimization algorithms. i'm working on an illustration of the above and will have it marked up so you can develop a picture in mind as to the "motion" of the system. hope to have something to distribute in the next few days. best regards, mike james Managing Member Equity Informatics, LLC phone:302-220-3864