what we do
Our focus is on the development of proprietary geodesic models that characterize the behavior of leveraged long/short ETFs in pairs trades using first principles of Hamilton-Lagrange-Euler mechanics. Because of tracking errors & daily compounding phenomena, equal weightings of leveraged ETFs in a pairs trade are virtually never 50-50. Daily data & graphics will show subscribers where neutral pair weightings have moved along the path of the pairs geodesic thereby providing multiple market direction & re-balance indicators.
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Today's Commentary
previous model indication: bearish on the S&P 500 since 2009-08-17 current model indication: bullish on the S&P 500 as of 2009-08-21 last week was on of the shortest bearish calls in time i can remember. the only day down was monday which precipitated the bearish signal but then the remainder of the week was - buy, buy, buy! note how the angular velocity parameter pulled back, relieving pressure from going to the downside. today's (8-24-2009) action, though not down to the extent as last monday, was a bit ominous. at one point the S&P 500 was up 1% or so and then a midday selloff took the index right back to unchanged for the day. no matter how small, midday reversals are not helpful to the bullish mentality. the fed's purchase of treasuries may have had the biggest influence in equities today. in addition, as the market has been going up, investors are stopping along the way to buy protection in the form of bonds & put options. disclosure: in my pairs trade i am weighted 95% spy & 5% sh. this is couterweighted with an accululating position in TLT, TLO TLH, IEF, IEI, BIV, BND & TIP. | | |
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:
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
as i indicated in an update last week, i dropped SDS & SSO from the S&P 500 model and substituted SH & SPY instead. so much negative compounding resulted in SSO becoming inelastic and is no longer able to counter the action of SDS effectively. it just happens that if the market did not stop going up like it has today and friday, the pairs trade was in danger of picking up inertia and moving out of dynamic equilibrium. SH is 1X inverse the S&P 500 and SPY is 1X the index.
note as of today we have again the condition where the S&P 500 market sentiment has changed from bullish to bearish according the geodesics of the pair. the model does not indicate how long this will be the case so as always hedging would be wise. the spreadsheet contains the neutral weights for SH & SPY. the weights can be used the same way as before.
disclosures: as of midday today i positioned my pair 50:50 SH & SPY and plan to let the pair adjust their weights according to market direction whichever way it wants to go. as the index trends, the ETF with the highest RSI will determine the pair value and weight spread. in a downward trend, SH should increase in weight and move the pair value up from here.
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| | as mentioned in yesterday's subscriber commentary, SSO has undergone undergone negative compounding & tracking error over the last year. it may soon not be possible to maintain SDS & SSO in equilibrium by adjusting only the weights of the pair. this introduces 2 complications. 1) if the market continues to skyroket higher, the pair will become dynamic as SDS declines and begins to drag down the pair with it. 2) if the market were to roll-over, which i think is an increasing likelyhood, SSO will undergo more "non-coformal" plastic flow which will render the ETF flat with very little to no elasticity to come back and balance the pair.
therefore after considerable review, i will continue my analysis of the S&P 500 index using SH instead of SDS and SPY instead of SSO. the substitution of the ETFs will change the magnitudes of the geodesic paramters but most of the important relationships between rates of change will stay intact which is the most valuable portion of the analysis anyway. for example, using the new ETFs the points in time when the rates of change of the parametric values cross is virtually identical to using the 2X levered ETFs. the crossing of these variables signal an indication index sentiment has changed.
finally, despite today's run up in the S&P 500, the probability of sentiment moved higher today than where it was yesterday using both geodesic models. this is not a prediction, just an increasing likelyhood the S&P 500 is in the process of topping out for a while.
stay tuned for more updates. | | |
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:
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 sold off today and sellers managed to contain late day buying & closed near the intraday low. the index fell -1.27%. this was the second down day in a row and the 4th out of the last five trading days the index has now closed down. whatelse that is noteworthy is the index today has not closed down this much in 1 trading day since july-7-2009. as far as the model analysis goes, the geodesic parameter rates of change are steadily approaching a cross which would signal a change in market sentiment. see below. however, based on the track record of this rally i will not speculate on when the cross will happen or if a sell-off will be sustained. every month since april around the 3rd week of the month the index starts to fawn as if it wants to roll over and all of a sudden buyers rush in driving the index higher. now that we are in august you'd figure, well, it's been 5 months of rally, rally, rally. up +50% from the lows. surely the index is due for a correction. sadely many market pronosticators, including myself, have been wrong about a correction since may. i see what the numbers are telling me from a technical perspective and i see what busines & economic fundamentals are telling me and i've guessed wrong about what the market will everytime. so i'm a bit more cautious and am positioned in my own pairs trade accordingly. in addition, i'm concerned that SSO has lost a great deal of needed "elastic memory" due to non-linear compounding & tracking errors. look at the chart below.  the light blue line is a relative %change plot for SDS and the orange line is the same for SSO. while the line for SDS has had a reasonable amount of change up and down for the last year, SSO has kind of remained compressed. instead of behaving like a compression spring and elongated after the load is removed, SSO is behaving more clay or silicone. a piece of clay that has been pressed in by an object remembers the shape of the object after the object has been removed from the clay. that's what makes clay or silicone a great material for mold making. ideally we like to have "stored energy" release itself as the opposing load decreases. otherwise we run into a case where the pair can not be kept in static equilibrium by changing the weights of the pairs alone. unless the market begins to significantly correct in the next week or so, the pairs trade will become dynamic and certain assumptions will have to change. more on this soon. disclosures: am about 50:50 SDS & SSO with my pairs trade at the close of today. | | |
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:
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
no particular commentary on the S&P 500 index action today. however, the model is beginning to show signs of weakness, again, in the index rally. the most important charts to watch this week are the SDS-SSO geodesic chart and the corresponding parametric rates of change chart. see below. first the parametric rates of change chart. the slopes of the 2 lines have been in the process of pointing to intersect each other for 8 trading days and the rate has picked steam today. the point in time when they intersect or cross each other will be a signal indicating a change in market sentiment. the next change would be from bullish to bearish. trying to project when this will happen exactly is a fools game. the dynamics of the market are not deterministic and if a change in sentiment does happen, there's nothing stopping the market to change it's mind and change sentiment again. so keep and eye on this chart on a regular basis. the chart of the geodesic shows how far the rally has extended itself in the last 3 weeks. the point at which the yellow coordinates depart from symmetry with the top line is a point i call "lost in space." the euphoria of an economic recovery has spilled over into buying at a point where the S&P 500 index has already retraced 50% from it's lows in march. this week the treasury has planned t-bill & bond auctions so expect to see money flow into them for protection that would have possibly flowed into equities. disclosures: my pair ratio currently is 70% SSO & 30% SSO. however i have reduced my overall exposure to the pairs trade by decreasing my long holdings in both SDS & SSO. the pairs trade is 2:1 over long holdings in the following ETFs in another account: BIV, BND, IEF, IEI, TLH, TLH & UUP. the 2:1 ratio could possibly change lower by the end of the week. | | |
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.
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 took a breather today & closed down -0.3%, essentially erasing yesterdays gains. the index followed a similar path as yesterday by starting down but rallied back to positive territory util sellers finally brought the index down on light volume.
let's put where we are in perspective. the S&P 500 and it's companion major averages have broken out and are sitting at or near new highs for the year. while the geodesic parameter vector-c has continued to move further away from the apex of it's path, the rate at which it's magnitude and angle are changing have leveled off, more or less moving in a a tight range. think of summer heat waves or winter cold spells. temperatures are at seasonal extremes but highs are not going higher, or lower. each day the temperature starts at the high and ends near the high. yes, it's a hot market but will (or can) it get any hotter is the question. economic data and earnings reports released this week seem to have been met with a lukewarm reception. nothing has sparked major action one way or another to change much, although the S&P 500 is up +1.54% for the week due to one days gains.
since geodesic parameter rates of change have flat lined, i contend any catalyst that has gotten us this far up has run dry. unless payroll reports beat economists estimates, the index may be in a position to rollover.
disclosure: so far this week i have allowed the ratio of my pair to float starting monday with 60:40 biased to SSO. to date, my ratio is 60:40 biased to SSO. so as you can see not much movement this week one way or another. i did add to my position tuesday & today at the running ratio at the time of the purchase. i'm expecting a sell-off tomorrow ahead of fridays payroll report. tomorrow i will gradually adjust the ratio to 50:50 by purchasing shares of SDS to finish the day @ 50:50.
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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:
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
not much changed today with the S&P 500 index or the geodesic model. the only take away was that the index started the day reasonably on the downside and managed to eek out a +0.30% finish. buyers maintained the S&P 500 above the 1000 mark for the second day in a row.
no question this market is on a tear. the lull in the activity today was likely an opportunity for some to get in the market who have not been able to yet while the bulls were taking a rest. the model indicators say this is the strongest sentiment in scale the market has seen up or down in several years. the rapid rate at which we got here has leveled off a bit but the temperature of the market is still boiling, so to speak. no indications this will significantly change for the foreseeable future.
disclosure: i am currently 60% SSO & 40% SDS. for the remainder of the week, i plan to let the pair naturally respond (adjust) to the market without forcing a changes to weights. the pair weights will adjust on their own. however, like today, i'll take some opportunities to add to the pair using the weights at the time of purchase. for example, if the weighting is 63% SSO & 37% SDS, i will buy shares of both ETFs at that weights.
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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:
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
well, based on my SDS-SSO geodesic model, the S&P 500 index appears to be "lost in space" and officially un-tethered from reality. for the bulls, this is a good thing. the geodesic parameters last week extended their positions well beyond it's most recent group of parameters. the yellow squares are the parameters coordinates over the last 15 trading days. the right most yellow pt corresponds to the coordinates as of EOD august 3, 2009. see below. the next chart plots the daily rates of change of the geodesic parameters. the slowing arc-length velocity seen above is confirmed by this data. very fast rates of change seen last week. if these 2 lines ever cross, that will be the models indicator that market sentiment has changed. in conjunction with this monday (aug-3-2009) mornings run up in the market, it is unlikely sentiment will be changing any time soon. finally, the scatter plot of the coordinates below are showing what i call "non-conformal plastic flow" or hysteresis. though the rates slowed down, they did not change along the same linear path as previous coordinates. this behavior may be indicative of how frothy the index has become. other than that, the full implications of this behavior is currently not known.  disclosures: i started last week at 65% SSO & 35% SDS and i gradually changed the weightings so as to finish the week at 60% SSO & 40% SDS. this was a forced response to market changes. for the rest of this week, i plan to let the pair auto-adjust their weights. as long as the RSI of SSO stays > RSI of SDS, the pair weighting will become more biased to SSO and increase in value. i may put more money to work periodically at whatever weights the pair is at the time of the purchase. this should have little to no influence on their pairs "natural response" to the market changes.
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Disclaimer
Equity Informatics is a developer and service provider of proprietary financial equity pricing models & trading methods. The company familiarizes subscribers with the basic thesis of our models, provides subscribers with daily neutral pair weightings and methodologies on how to use the data as intended. subscribers shall not share any information obtained from equity informatics with any other party. use of these services are granted only to and intended for the benefit of the subscriber. Equity Informatics does not offer the sale of equities nor do our trading models constitute trading advise. It is incumbent on potential clients to perform due diligence and seek a professional financial adviser to help you determine whether subscribing to the company's services are suitable for your financial situation and level of risk. No guarentees of performance are expressly or implicitly offered nor does Equity Informatics guarantee the accuracy of market information used to provide model data to our client. equity informatics does not assume responsibility for lost principal, lost gains or tax consequences.
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