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
another wavering day for the S&P 500 index. the index closed essentially unchanged down 0.05% for the day. the index has taken a breather over the last two trading days from it's historic 6 or 7 day meteoric rise. momentum upward measured by arc-length traveled along the geodesic has not abated which indicates lag in the model from using 12 day moving averages in rices changes. however acceleration of the geodesic parameters coordinates has leveled off. as stated in yesterday's commentary, there appears to be more room for upward movement in the S&P 500 but margin maybe shrinking faster than anticipated yesterday.
for very conservative hedgers, this is probably a good time to sell SSO or re-balance your portfolio to 50:50 before the re-balance signal is indicated. it is no recommended any longer for conservative users of this pairs trade strategy to re-balance pairs to the neutral weights computed by the model. reason being those weights are changing on a daily basis and can actually make portfolios appear unstable. isn't that's what the neutral weighted data was for? initially that was the conservative hedge strategy prior to the development of the geodesic characterization.
before or after a market direction changes are called, typically the numerator of the fraction grows faster than the denominator. as a result the value of the pair increases as the geodesic coordinates move in the opposite direction along the path. gains are smaller this way, but much more forgiving if the market waffles before taking a decided direction.
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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
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. | | |
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 ran flat from the open to about 1:30 PM EST and continued it's rapid pace upward. at the EOD, model data reflected this movement by continuing the mild bullish bias started yesterday.
geodesic coordinates are moving toward the tail of the path in a fairly orderly fashion. data coordinates plotted in the diff-theta vs diff-c scatter plot established it's second point in this new series of data in the 4th quadrant. yesterday i expressed some concern with that, but this is actually consistent with the motion illustrated in the geodesic plot. as the index advances, the amplitude of vector-c increase while the angle is decreasing in this part of the cycle. i'll have to break this behavior down further in special commentary all it's own.
expect the S&P 500 index to advance again tomorrow. how long this advance continues is not known. however, look at the chart of the amplitude of vector-c. looks like a right shoulder emerging, doesn't it? not exactly symmetrical, but that's what it looks like. this indicates to me we're going against a larger overall trend. this could potentially persist for a while. but it's just putting the inevitable further down the road. at the same time, this could be a reflection of a much larger run up in the index than anticipated. we'll see.
for now, it's probably safe for a while to be biased to SSO in your pairs trade. safety also precludes keeping a reasonable amount of cash on the side lines. around 1/3 of the overall holding is probably a good number at this point in the cycle. if the advance continues to explode, it's reasonable to say a lower percentage of cash is natural. of course that decision is always yours to make. | | |
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 expected with the explosive move up of the S&P 500 index, the model now indicates a mild bullish bias. the erratic behavior of the index over the last 10 trading days or so has been mirrored by the model with several flip-flop market direction change indications. this is usually a sign of indecisive interest in the market. are we going up or down? that kind of thing. though the market exploded higher today, it's still unclear to me how many legs this upswing has. but for now, the trend is certainly upward.
the yellow square dots in the geodesic charts represents parameter coordinate movement during this upward motion in the index. the direction of movement is away from the apex out to the end of the lower portion of the path. the scatter plot of the parameters 1st order time rate of change shows a coordinate move into the 4th quandrant which means the amplitude of the wave change is positive but angular velocity is negative. the full implication of this is not clear other than the run up in the index has slightly different characteristics. apparently there are forces pulling the index to equilbrium (back toward the apex) or this is a transient effect of the change in market direction change. it's more like the latter i fell but we'll see.
hopefully readers have some cash to put to work incase this optimism becomes euphoric. it's not clear if the index will pop tomorrow as high as it did today or at all. but more key earnings reports in the next few days are likely to beat wall street forecasts.
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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
even with the tiny move up in the S&P 500 index today, the model indicator switch back to a weak bearish bias. but i don't think it will vacillate much longer. since june 16th the market has been more bearish than bullish. when i look at the RSI plots of SDS & SSO, the indication now in retrospect has been a directionless market. sentiment on the street is rapidly changing indicated by the VIX dropping from a high of 33 to 25.02 in 5 trading days. that's roughly a 32% change. i have added a new time series on the geodesic chart starting with coordinates from today's data. the new time series data is annotated in yellow squares. see below. tomorrow i will update the cooresponding scatter plot of the paramters rates of change to coincide with this new time series and include it in the spreadsheet from here out. unlike the last time few times when the direction bias changed for a day and flipped right back, my sense is the market is about to make a fast move up in the short-term. this judgment has more to do with how earnings results have been beating to the upside. even though reporting just got started, i don't see anything at this point that will change the current optimism. so consider curtailing (not eliminating) whatever hedges you have to the downside. the model will have to catch-up with the market. watch the time series on the above chart progress in future 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
with the 2.5% run-up in the S&P 500 index today, the models geodesic parameters crossed over which is an indication of market direction change. the RSI indicator plot in the spreadsheet shows a similar confirmation in market direction change. lastly, coordinates in a scatter plot (not included in the spreadsheet but included below) of the geodesic parameters time rate of change shows a change in quandrants, another indication of market direction change. therefore the model is indicating a weak bullish bias in the S&P 500. the coordinates that moved into the 4th quadrant are shown as a blue asterisk. there is one other point there from 7-1-09 when the index popped but went back down. having said all that, the S&P 500 index moved in lock-step with a pattern that has repeated several times since the end of apr-2009. observe the following dates in the chart below: 4-20-09, 5-26-09, 6-24-09, 7-13-09 during expiration week, the S&P 500 index began new rallys. and each time the rally was less intense and shorter in duration. the question is will the pop in the index today repeat this pattern, less intense and shorter in duration. if so, this rally may last 3 - 5 trading days max. therefore consider building a small position in SDS over the next few days. stop accumulating if the price drops below $54.7 - $56.0 and then hold. if the pattern holds, you should be able to unload the hedge in a week or 2 for a small gain. | |
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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
again, very little change in EOD performance in the S&P 500 index. model indicators are still bearish on the index. stay cautious and keep accumulating as much cash as possible. the index will not keep going sideways like this forever.
i have a few comments on the overall state of the S&P 500 index according the model. the model shows that the index is still "over-wound" to the upside and has more room to go down than up. sure, anything is possible. in my opinion, going up from here would require a huge amount of conviction that businesses in the index will not only beat but exceedingly beat their projected Q2 earnings and outlook would have to be nothing but rosy. secondly, global demand for products and services would have to be at all time highs in order to provide the index additional potential to run up another 20% or more from here over the next 4 - 6 weeks.
the index is "over-wound" from this perspective. just like the natural seasons we experience on earth, economic, business & indexes have defined seasons as well. those seasons are not as regular and smooth as the earths, but they exist. no matter how long an economic cycle stays in a particular season, the economy must follow a series of defined seasons in the same order in order to stay viable. the SDS-SSO geodesic is a reflection of what season the S&P 500 index is in and what season is coming next.
the geodesic coordinates seem to be saying to me the S&P 500 index is an early stage of decline as it is retracing it's path back toward the other extreme. the assumptions i have made in constructing the geodesic model for the S&P 500 are based upon the premise that seasonal index changes maintain continuity along the geodesic path independent of time variations. in other words, the model allows for small retracements along the geodesic but overall motion is harmonic in nature and in order.
there are no set rules on how long the index stays in a season, but once it's established a new season it must precess to the next ordered season no matter how long it takes. if the S&P 500 model geodesic coordinates had already passed back through it's apex and spent a meaningful amount of time ending a season on the otherside of the geodesic and was retracing back the other way, then yeah i'd say we're bound to see significant upside movement in the S&P 500 index.
so, until the geodesic coordinates trace the path to the other side there will inevitably be from this point more down motion in the S&P 500 index than up for quite some time.
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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
another daily unchanged performance for the S&P 500 index. my 2 primary indicators for market direction changes are still bearish on the index. the first indicator is the chart below: the blue line is still on top of the x-axis since the last crossover on june 16, 2009. but as you see the slopes of the two curves are pointed toward each other and not too far from the x-axis anyway. the second indicator is a plot comparison between the RSI of SDS & SSO. see below: 
RSI of SDS is greater than RSI for SSO, hence bearish. if the top most chart signals a market direction change, the RSI chart above will confirm that signal usually within a trading day or 2 by flipping RSIs. however, signals from using RSI tends to be a bit noisy (multiple signals in a short period of time). that's why i use this data as a backup to the time series plot of the geodesic parameters.
there's yet a few other indicators the sell-off may be taking a breather - 2 chart indicators from the previous version of the model. these indicators tend to be a bit more forward indicating, hence more prone to false signals. see below: this chart was a type of approximation of the behavior for the geodesic before the geodesic was established. when the green line crossed over the x-axis, the approximation signaled a market direction change. it has done so as of today. note that the crossover points in time closely match the coincident crossovers of the geodesic parameters. the approximation above was obtained using principals of machine control theory and tuned to match characteristics of the behavior of the S&P 500 index. the tweaking process to get these results was very arduous and empirical in nature. same with the chart below: another chart from the previous model. when the slope of the green line turned 0, the model indicated a market direction change. the slope of the curve is starting to pull up (positive). since the geodesic is fundamental to the behavior of a "neutrally" weighted pairs trade for SDS & SSO, all signals will be issued using the outcome of that data. the old indicators are still included in the Excel spreadsheet analysis for reference, however. the bottom line is be cautious and keep a far amount of cash on the sidelines. if the index kind of wiggles around it's current position, ultra aggressive hedging one way or the other could result in unexpected losses from chasing noisy signals. | | |
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 rate of selling is picking up steam in the S&P 500. the most current geodesic coordinates took a heft jump back toward the apex of the path. conservative minded hedgers ought consider adjusting their SDS-SSO pair to neutral weights or slightly biased to SDS and let the portfolio adjust gains itself. more aggressive hedging would be setting a much higher pair weight to SDS. even conservatively hedged pairs will pickup growth as the selling progresses. add money as you go by buying the pair on days the index rallies. buy the pair at whatever weight the pair has adjusted itself to, not to neutral.
as mentioned already, keep in mind while you do this, the weighting of SDS in your pair will tend to increase on it's own widening the spread to neutral as the index declines. neutral weightings will go the opposite way which reflects a higher potential building up in your pair. just remember, higher potential means higher risk. but with this model, you have a way of measuring and regulating the risk to your tolerance level.
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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
going strictly by the numbers, the model is indicating a reversal back toward a bullish position. RSI favors SSO & the geodesic parmeters 1st order rates of change have crossed each at the x-axis. just like most other technical indicators, the SDS-SSO geodesic shows where we've been and provides a sense of trend in the very short-term. This indicator does not indicate overbought or oversold conditions like MACD or other well-known stoicastic indicators. having said that, the coordinates on the geodesic are likely to change direction within 3 - 5 trading days from now.
while using a scatter plot of the geodesic paramters 1st order rates of change data, i'm finding the data is changing linearly with respect to each other. i will be studying this data to determine what the indication may be when these changes become non-linear. the behavior of these swings along the geodesic is like a non-linear pendulum. in the case of a real pendulum, a weight is attached to a wire of rod of some material that has a very high spring constant. as far as the weight is concerned, the distance from the weight & center of rotation never change, nor the mass of the weight.
in our case we have a pendulum which has a variable mass attached to a spring with a variable spring constant. the motion of a system (with respect to time) is non-linear and very erractic. the motion of the mass would be swinging and bobbing with no fixed frequency. such a system still must follow the laws of physics. the solution to the equations of motion are much more complex, however. the motion of the whole system fortunately follows along a geodesic with some degree of symmetry.
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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, the amplitude of vector c shrunk and the most recent coordinate on the geodesic line moved back toward the apex. diff c & diff theta met and crossed each other which is a clear sign of systemic contraction in the S&P 500. in normal trading conditions this would constitute a signal to re-bias ultra pair portfolios and possibly re-balance neutral pair portfolios.
the market rally has been hyper-extended buy irrational buying on dips since the market rally began in mid-march 2009. if there is any more appetite for buying, i would expect to see buyers come out of the wood-works tomorrow. on the other hand, the RSI indicator for SSO & the S&P 500 have crosed below 50% for the first time since the february 2009 market swoon. so there's plenty to be caution about right now.
the PID-7 indicators are still lagging the rates of change in the geodesic. vector c shrunk a few days in a row about a month ago in may only to have buyers lift the market to it's most recent high of ~946 just last friday. what i want to see now is the neutral portfolio performance line dip below 100% ideally before calling an office change in market direction. i also want to see both PID-7 re-balance indicator cross the x-axis.
so here's what i'm doing now. i've decided to reset my portfolio to neutral. the neutral weightings are already biased toward SDS so if the market goes down, the weight of SDS will increase from here and SSO will decrease. i plan to incrementally add funds in my portfolio at the whatever weight distribution are set when i buy BOTH ETFs. if the weighting of SDS has drifted up to 70%, i will add 70% of my funds to SDS & 30% of my funds to SSO. if the market continues to slide downward, the weight of SDS in the portfolio will continue to increase.
when the scenario above takes place, don't be confused by the change in direction in the neutral weights the model outputs and the actuall weights of the ETFs in the portfolio. remember, when the market slides down the price/share of SDS will increase. at the ed of each day the neutral weights will shift the weighting of SDS down to maintain neutral equilibrium. once i set my pair to neutral and the market continues to slide down, i will not re-balance back to neutral which will defeat the objective. i will let the weights of the portfolio take care of themselves and periodically add new money at whatever weight distribution the pair is presently at the time of purchase.
hope this little bit of strategy helps.
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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
with today's sell-off, the SDS-SSO indicators are once again pointing to a market direction change. we've had this condition several times since the market lows in mid-march '09. look at the RSI chart. vector c, which is a less prone to false indications, even anticipated a direction change last month around this time. then the buying came back with a vengance.
a few things to keep in mind this time. several large U.S. banks with large TARP contributions from the federal government passed the govt's stress test a month ago and last week recieve OK from the treasury to re-pay their TARP. combine that with the fact that we are roughly 2 weeks away from the end of Q2-2009 and we have a situation ready for earnings window dressing to take place. anticipate the possibility that a market correction of sorts is right around the corner.
the plot of the magnitude/amplitude of vector c is flattening off and note the last point on the geodesic is closer to the previous point which indicates some slowdown in the S&P 500 rate of growth. also look at the chart plotting the rates of changes for the geodesic parameters. the lines are pointed toward each other indicating sluggishness as well. if those line meet, according to the model the event will trigger a prompt to re-bias high beta oriented pair position & re-balance a nuetral pair position if you have any. keep close eye on the commentary this week.
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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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