SDS-SSO Model Update - July 20, 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-20090720-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 the S&P 500 index continued it's upward momentum by closing up 1.14% & now closing at it's highest levels since Q4 2008. the amount of arc-length equilibrium covers along the geodesic path per day is increasing day by day. the model is now indicating a strengthening bullish bias to SSO. remember, equilibrium is the point at which the weightings of SDS & SSO are adjusted to maintain a delta neutral as compounding & slippage of the ETFs change over a 12 day trading period of time. the weightings account for the uneven ETF time rates of price change over the said period of time. the geodesic is a symmetric graphical representation of 2 parameters associated with the change in weights. 2 parameters are quantified from the data and defined as the geodesic parameters. those two parameters for this model are the amplitude of vector-c, sometimes denoted as ||vector-c||, and the angle theta. in classical mechanics, geodesics are useful characterizations of systems which are multi-variable in nature where these variables change at varying rates. the geodesic then can be thought of as the path the variables follow that stipulates the least amount of change per variable to maintain equilibrium if the system is pertured. in our case, the 2 variables are the weights of SDS & SSO in a pairs trade and their corresponding time rates of change in price. once we have this data, system equilibrium is defined to move along a specific path or surface. in our case, the path is curved line in the shape of a parabola shape which is symmetrical about an axis of rotation; again in our case the x-axis. since we have acquired enough data of closing ETF prices over several years, the path of the geodesic is empirically derived without the need to solve partial differential equations. another useful bit of information is knowing the time rate of change of the geodesic parameters. when plotted against time, this data is very useful to indicate when the system is changing direction and at what rate. when those 2 rates meet each other, they will always meet at the x-axis. this is because the system parameters have the mathematical roots. in addition, when these parameters are plotted in a scatter plot (which is all the geodesic curve is), the data reveals 4 quadrants which indicates more clearly what the system is doing as rates change. so there is another level of refinement of understanding the behavior of the system using geodesic data. the bullish bias is strengthening because the amount of arc-length traveled per day along the geodesic is increasing. see the chart entitled chart_vector-c_rates_of_change_20090720 and the variable denoted as diff c. this is the variable to watch, in addition to diff theta, that measures the increase or decrease in momentum, in our case the momentum of the S&P 500 index. this is not to be confused with other technical analysis momentum indicators. however, they should point in the same general direction. keep a reason amount of cash on the sidelines in case market sentiment suddenly changes. besides selling, the additional cash can be used to change your pair trade bias to help mitigate loss of capital. best regards, mike james Managing Member Equity Informatics, LLC phone:302-220-3864