Feb 8 -Trade Update

We just had a fantastic blow out jobs report that has contributed to the fall in TLT, VNQ and LQD.  The basic tenant is that good numbers will prompt the fed to increase rates earlier rather than later and this pressures REITs, Utilities and Treasuries. Unfortunately this is the bulk of our momentum portfolio! However, I mean, the global situation is deteriorating (bad Chinese data, Greece, Ukraine etc) so who knows where the month will end.  Despite the positive numbers, many experts don’t see a reason for the fed to increase rates this year.  Alas, the market reaction (OVER-reaction) was a sell-off in anything affected by higher interest rates. This affects our momentum portfolio.

Momentum Portfolio (February)

In the momentum portfolio we still hold TLT (+.06%), VNQ(-0.33%) and LQD(+0.06%).  The momentum portion of our portfolio is suffering this month. It’s not overly surprising as we did just have an epic month in this portion of the portfolio, I guess we’re just reverting to the mean.  I mean, we’re probably still up 4% overall on that part. So no complaints! Though I post these sorts of short term results, we shouldn’t really be taking them so seriously.  The momentum strategy will average 14-16% a year (if we leverage 1.6x it’ll be 22-25%) and we’ll have periodic draw downs of 10-12% ( 16-20% leveraged). That’s what it is. There’s no discretion, nothing we can do to beat it, we’ve trusted in the strategy and we are along for the ride. My hope is that these various strategies will work together to make this ride as stable as it can be.  My aim is to remove all discretion from trading and follow the systems set forth.  Every 1st day of the month we rebalance the portfolio and take the top 3 of 15 ETFs and hope for the best. No discretion.

Pair Trade (February)

The pair trade for March is suffering as the massive drop in TLT over the past few weeks (nearly 6%!) hasn’t been accompanied by a big rise in SPY overall.  So basically, they are both declining. Not ideal but over time it’ll work out. We can expect 15-20% declines at times with this trade. It’s high variance. It will happen.  You can’t get 10-15% months without that sort of volatility.  Right now, after a successful month of the pair trade, well we’re kind of experiencing the dreaded volatility. We’re down probably about 5% as of right now on this trade. We did about 10% the month before (I still need to calculate everything).

Protector Trade (February)

The protector is doing fine and as expected.  It’s down as of today because well, its the start of the year and we’re still paying for the hedge. Down movements will bring the trade into a negative situation temporarily. We have to let the year ride out. I believe we’re probably down a few % on this one.  As the year goes on and as the hedge gets paid for, it’ll start turning a profit.  This is a full year portfolio and we expect it to do 12-15% a year (14-18% leveraged at 1.6) and it’ll have very low drawdowns even in crashes.

The alpha portion seems to be doing good this month compared to last. OCN has rebounded a bit and QCOM as well. We’ve got some winners as well, despite the market being down.

 

 

Feb 7 – Trade update

Sorry for lack of responses. I was at a very busy conference that was chalked full of meetings upon meetings and some socializing. The conference went very well and was a great opportunity for internal team building and realignment of the company goals. Was happy to be there.

Volatile times. Since December, SPX has lost 5%, gained 6%, lost 5%, gained 4%, lost 4%, gained 4%, lost 4% and now gained nearly 5%. The whipsaw isn’t great for our protector portfolio but it’s not doing too bad despite.

TLT -5.44% on the week which really hurts our momentum and pair trades for February. Let’s see how it does next week. A strong January for the portfolio is leading to a weak February at least so far. That’s mainly due to a terrible day for VNQ and TLT which is 66% of our momentum portfolio. They were down 3% and 2% on the day. A bit of a rebound in Both would do fantastic for the portfolio.

I’ve decided to invest a small portion of capital into the covenant optimal fund. It’s a 5x version of their classical fund and operates on 80% volatility. It’s a managed futures fund and would complement my portfolio very nicely especially as crisis alpha. I’d highly suggest listening to some podcasts of Scot Billington the founder. The thing I like is the low tied up capital required to obtain high return (with high risk of course). Remember it’s a 5x version (5x leverage essentially). You’d use 50k to represent 250k of risk. Lower tied up equity etc

Results for 2014:
*note: this is a very volatile version of the classical fund which returns approximately 14-15%. This version is extremely high volatility but you assign an equally lower amount of equity.

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Some pics of London Town

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Jan 30 – Trade Update

Whirlwind of a day yet again.  The SPY/TLT portion was getting pressured quite a bit with the huge fall to about 198.6 (It’s still up quite a bit –> 8-10%). When we had a relief bounce to about 199.5 I reluctantly took some of the SPY portion off to manage risk. Of course, it continues on to 202.4 in A/H and I could have gotten a much better price.  However, I believed it was an appropriate time to remove some of the trade as we were approaching a pretty major support line for the third time, and when things test a third time they usually break. Pretty sure there is  saying “There are no triple bottoms”.  A break would have been quite violent as it burned through stop-losses etc and would have really affected the trade negatively. Either way, it was just a portion and it was appropriate re risk to start removing some.  I took off another 25%.  On Monday, I took about 20% of the trade off and of course, I wished I took it all off but it wasn’t part of the plan. I wanted to remove it in steps to maximize our exit. We can’t predict where the market will go and unfortunately this time it went slightly against us. Again, a messy week (206 to 198.6) and we took a bit of a hit on the profitability of the trade.  Not bad considering the volatile month but you always end up comparing results to your all time highs for the trade and that is just useless.

Our standard protector portfolios are going as expected. Down about .5 to .6% or so. Completely normal given the market conditions.

Our alpha portion is lagging the standard by quite a bit (-3% or so).  2 out of 30 equities are causing the majority of the pain (OCN and QCOM). I’ve got four parts of alpha one being a 13F clone and that portion is doing terribly while the other 3 are doing well and beating the index. As I mentioned before, I am replacing the 13F portion with ALFA which does a much much better job (100+ equities) and is managed by a great firm.  A lot less volatility.

Our momentum portfolio continues to outperform and literally is crushing. It’s got to be up close to 6-7%.

 

Jan 29 -Trade Update and upcoming London trip

There’s been a lack of posts lately, been busy for the last 4 days preparing for a conference and catching up on work. I am going to UK/London on Sunday for a conference so I gather I’ll have more travel posts during that time 🙂

The market has been moving.  It was 206.24 a few days ago and yesterday it reached 199.7.  Big swings with yesterdays being the largest. The TRIN was 3.5

What is the TRIN?

TRIN = (# of advancing stocks / # of declining stocks) / (up-volume/down-volume)

Well, it probably isn’t useful to really get into it but a high TRIN shows that bears are overly optimistic and that the market is nearing a bottom. A low TRIN shows the opposite: the bulls are overoptimistic, the rally is unjustified and a market top is near.

The TRIN(Arms index), looks at up-volume and up-issues to down-volume and down-issues for the NYSE market. It is the ratio of advances to declines divided by the ratio of up-volume to down-volume.

I wanted to look at exactly how the portfolios performed during a major distribution day like this.

The result?  If I don’t include QCOM A/H earnings movement we’re sitting at -0.63% for the day while the market moved about -2%. Does it mean anything? Not really. But it gives us an idea of drawdowns in large 90% major distribution days like yesterday.

Why, if we are completely insured, would we expect to fall on a down day?

Well,

short answer: it’s because this is a year long strategy.

long answer: It’s all to do with the pricing of the insurance/spy puts. ATM (at the money) puts have a delta of 0.5. What is delta? Well, it’s the amount the option will increase/decrease in price with a movement of $1 in the underlying equity. It essentially says you have 50% odds of a move in either direction.

For instance: We purchase 205 puts at $15 and the market is at $205 so we purchase that as our equity.  Market moves down to 204.  We lose $1 in the market and our insurance increases by 50c so it’s trading at 15.5. We’re down temporarily about 50c.  As the market moves away from our strike (205) the delta will start to approach 1 and it’ll move in sync.  If the market hits 185 our 205 insurance puts will be trading at about a delta of 1 so any down movement will be perfectly aligned with our equities.

I am annoyed by a few of the alpha picks.  OCN was a huge drain on the month as was yesterdays QCOM A/H movement of -10% has hurt.  Part of the game I guess.

How’d our momentum do yesterday?  + 0.75%.  TLT was up quite a bit, VNQ was down and LQD was up.  Nice hedge isn’t it?

How’d our SPY/TLT trade do?  Not great as expected.  We did exit about 25-30% earlier in the week but my plan was to roll it on Friday the 30th. Unfortunately we’ve had a major market move which goes against us but that is sticking to the plan. The SPY/TLT trade is down -3.4% for the day.  The trade itself is still up though, probably close to 10-11%. We did add TLT spreads both in March and February throughout the week that helped with the trade.  Any decrease in VIX (volatility index) will help the trade. Why? Well options are priced higher when the unsurity or requirement for insurance increases (supply/demand). When there is fear in the market, people pay more for insurance (usually options) and that increases the costs for us to close the trade.  VIX usually spikes on large down days and collapses on calmer days. A calm day would be an ideal day to close this trade.  Tomorrow we’ll likely start entering March trade regardless whether we close our Feb one or not.

 

Jan 24 – Portfolio Update

So far a fantastic month for the portfolio. It’s been volatile but we’re doing very well despite all of that and having ended up right at about 205 at the time of this writing.  As I wrote a week or so ago:

Markets have been quite volatile since the start of the new year. The dow has had several 200 +/- points days. Price discovery amidst all of the uncertainty. What effect does low oil have on the economy? What effect does an extremely strong dollar have? Will companies report lower earnings due to the lower euro?  There is the potential greek exit, the potential QE from ECB on the 22nd. Just a boat load of uncertainty and markets hate uncertainty.   Through out all of the swings from 208 to 198 my overall portfolio moves about 2% up or down.  This is why I’ve constructed things the way I have. Most of the 2% movement comes from the on/off volatility in the options of the SPY/TLT pair trade.  If the market moves slowly down my balance barely changes but if there is a quick jolt to the same place and VIX goes up drastically, I see the balance change due to heavy pricing of the spy options.

To summarize:

Protector (Alpha + Standard):  This is the all-weather portfolio. It’s a completely hedged equity portfolio. We purchase year-out ATM spy puts in the amount to 100% insure the equity and then we purchase about 30-40% in additional puts of which we sell against on a short term basis with enough extrinsic value to pay off the hedge over the course of 1 year. In essence, we purchase 140% 1-year out ATM puts, sell 40% short term puts with enough extrinsic value on a weekly basis (approx 65c) to cover the entire cost of the 140% long puts. It’s been backtested to death and works well with a very very low max draw down. A great strategy that can take on a little leverage. In essence, our portfolio is completely protected and performs in any bear markets though does slightly under perform in a prolonged bull market. Essentially, It performs in all market types but does have challenges in an on-going whip saw environment. The way I sell the puts is quite complicated and combats the whip saw weakness. This method took a few years to fine tune. All the complication is in how the weekly puts are sold.

We do a split where we have the regular old market via RSP and another half of alpha generating equities that do have correlation to the regular market so as to be protected in any bear market. The alpha generating equities is where I have some “secret sauce” ways of finding alpha. In general the alpha comes from some momentum analyis, quantitative analysis (mechanical trading) and even some 13F cloning. Our current portfolio is neutral to slightly up for January.

Momentum: This component rotates through 15 ETFs (bonds, equities, treasuries, some commodities and REITs) by selecting the top 3 which are above the 200 DMA and rotating on a monthly basis. It has a max draw down of 10-15% and expected to return 15-18% a year. It naturally avoids bear markets by selecting non-equity ETFs like TLT and VNQ. We’re currently in TLT, VNQ, LQD.  Those three have provided a 6.8% return in January alone.  A perfect additional hedge to our protector portfolio.

SPY/TLT pair trade: This is an option based strategy where we do a pair trade of debit spreads of SPY and TLT which are negatively correlated.  We’re doing very well in this for the current month. Up about 20%.  This is the highest variance portion of the portfolio and does have a smaller allocation.

Earnings Volatility trades:  We’ve done a few earnings volatility trades this month (GOOG, NFLX, FB, MSFT, BABA).  These are volatility based trades and are completely unrelated to any of the above.

 

Jan 23 – Munich (No market commentary)

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Above: The Window where Goebbels gave the “Broken Glass” order. That night thousands of Jewish store fronts and homes were vandalized.

Below: The Beer hall where hitler gave his speech to German worker party laying out 25 point plan in 1920 and subsequently renamed the party to the nationalist socialist party or nazi for short

Interestingly enough, JFK also came here as a young lad in the late 30s. He sat next to a few SS officers who told him that if he drank four liters he would be able to keep the stein. This, of course, was a lie. He did drink them and ended up wasted trying to leave with the Stein. They caught him and subsequently banned him for life. The SS officers laughed at him as he was apprehended.

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Most epic day of travel. We stumbled upon a free walking tour (pay in tips at the end whatever you think)

It was the best tour I’ve ever had in terms of quality of information, engagement and just plain epic. Most of Munich history is tied together by beer and of course later the formation of the nazi party. So the tour took us to sites related to those things.

Hitler had started as a spy and was assigned to the workers party when there were only 50 members. Not being a great spy he was outraged by comments that he heard and stood up and gave a speech. The workers party loved him and asked him to join. Soon it rose to 109 members when he gave another speech and within one year 1200 members. So much for being a spy. The rest is history.

We stood in the square were he gave many speeches and apparently doing a nazi solute is illegal to the point of 2500 euros and instant deportation. It’s a famous place for neo nazis

Picture below

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Jan 22 -Munich and market update

Surprise. I am going to Munich this weekend. My SO had arranged a weekend getaway without kids. It’s the last time we will have someone (thanks guys) to watch the kids for Probably at least a year. Really the last opportunity to get alone time for a while. So yah, I Guess I am traveling again at least for a few days. Should be a nice romantic getaway. May see eagles nest and stop in Salzburg.

Today ECB will announce QE. The amount leaked was 50bn a month. So the bond and equities market should be quite volatile today. TLT is currently down about 3 percent from yesterday with 135.3 to 131.5. That puts pressure on the TLT portion of the trade but an equal rise in Spy will offset that. Obviously our momentum portion which includes TLT should also suffer but our protector portfolio should benefit.

Jan 20th – Market and commentary

Lately I’ve been listening to some pod casts at night. There’s about 300 interesting ones under Covel on iTunes. They’re free. Worth checking out. Yesterday was Meb Faber and the day before that was Tom Basso.  Both worth listening to. Meb Faber is the author of Ivy Portfolio and a well respected momentum expert.  Some of the portfolio we follow is based on his work.  Tom Basso is another momentum guy, he started TrendStat back in the 80s.  A lot of these podcasts are about life in general as well as trading and the relationship between both.

Tom Bassos most recent podcast was a bit eye opening and inspiring.  He’s a very well respected manager and he determined that sitting in from of the screens and doing discretionary trading above and beyond his already set system ended up being net zero. They tracked it. No benefits, so he fired himself from actually actively trading in front of the screen. It’s not quality of life to always be glued to the screens and the market. It’s something that I struggled with a bit after leaving the more active trading style that I had last year. I was so used to having to be connected and monitoring the markets that it was sort of hard to disconnect from it. I started asking myself the question, like what would I do anyways? I mean there is a few hedges I could add and things like that but really, those aren’t time sensitive and any timing used intra day would probably be net-zero over time.   I still find myself wanting to know whats going on in the market and still being glued to the screens during events like the Fed meetings or the jobs reports etc etc.  There’s no need. I am slowly adjusting to that, it’s a challenge but it’s coming. It’s part of the game when you get into something like this, you feel like you want to control it. But the point of moving to the new style was to get away from having to actively trade on market events and movements in an intra-day manner.  I’ve got portfolios constructed that are hedged and complement each other. We’re set and we can handle any directional movement.  A funny note: You know what’s funny and sort of irrational. I find myself putting on a hedge or something similar and then hoping that the hedge itself wasn’t an error and that in of itself almost makes me want the market to go with the hedge even though I put it on to protect a much bigger position in the opposite position. Why? Well it was a discretionary trade where I had to use my best judgement, and well, I don’t want to be wrong on those as it can cause some stress BECAUSE it was based on a decision I made that was not part of the pre-determined system. It’s irrational and of course I don’t really want the market to move those ways but the thought enters the mind all the same. The psychology of these things is quite funny.

Jan 16 – Market Update

So as per my post on Jan 7th

“The market bounced up to about 202.2 and I proceeded to add some insurance in the form of additional TLT equity AND credit spreads. I rolled down a few of my SPY short puts (from 207.5 to 204 and moved them a further two weeks out).  I fully expect the market to test the December lows  and subsequent 200 daily moving average in the next while. I used the bounce to better balance myself in the event of another down leg. “

It looks like we’re on our way to testing the Dec lows. I’d almost consider it fulfilled in after hours trading but we’ve not seen spikes in the TRIN or put-call ratio which usually marks bottoms.  SPY (S&P 500 index aka the market) has been down 5 days in a row which usually calls for a bounce (if you bought at close you have nearly 90% chance of eventually making money).  A spike down towards the 200 DMA and Dec Lows would give us the conditions for an oversold bounce and would likely be accompanied by the usually spike in TRIN and Put/call ratio. Ironically, It’s the most bullish case (a quick down movement to 200 DMA) for a subsequent bounce.

Our SPY/TLT trade will be pressured quite a bit here. I expect it to head towards break even as we test the 197 area.  Our momentum trades are doing very well and our protector standard is down and our protector alpha is doing worse than our standard due to the OCN beat down but I consider all of those temporary.

 

Jan 15 – Market Update

 

Back at work.

Markets have been quite volatile since the start of the new year. The dow has had several 200 +/- points days. Price discovery amidst all of the uncertainty. What effect does low oil have on the economy? What effect does an extremely strong dollar have? Will companies report lower earnings due to the lower euro?  There is the potential greek exit, the potential QE from ECB on the 22nd. Just a boat load of uncertainty and markets hate uncertainty.   Through out all of the swings from 208 to 198 my overall portfolio moves about 2% up or down.  This is why I’ve constructed things the way I have. Most of the 2% movement comes from the on/off volatility in the options of the SPY/TLT pair trade.  If the market moves slowly down my balance barely changes but if there is a quick jolt to the same place and VIX goes up drastically, I see the balance change due to heavy pricing of the spy options.

Update: 1:30pm GMT

Market isn’t even open yet and the volatility continues. A 41 handle swing as ES hits 2027 and falls to 1986 on the Swiss/EU unpegging bombshell. It’s now trading at 2010. That’s some large volatility for after-hours futures trading.

As for a review of the current portfolio and how it works:

We have what I call the protector portfolio which comes in two flavours (standard and alpha). This is a completely insured portfolio of equities that performs in all market types. It “may” slightly lag the market in prolonged bull markets in exchange for absolute protection and even very large profit in a bear market. It’s an all weather portfolio that has extremely low max draw downs. It’s the cornerstone of my portfolio.

Next we have is the momentum rotation portion which also has low drawdowns. It’s somewhat based off of the work of Meb Faber and closely mimics the Harvard and Yale endowments. We’re rotating between 15 ETFs based on relative strength and absolute strength. This provides some diversification as it is not very correlated to the market and can be hedge. This last month it’s been an extremely effective hedge. We’re in TLT, LQD and VNQ and all three are up very largely offsetting any down movements in SPY/TLT and our protector portfolio.

Next we have SPY/TLT pair trade.  This is our monthly option trading strategy. It’s essentially OTM pair credit spreads. We expect about 15% a month from these.  These can be volatile. It’s a small portion of the portfolio but provide large returns. Backtested 8 years shows very strong results (~12%-15% a month). But you can also have drawdowns in market declines as the credit for the TLT spread won’t offset the loss in the SPY spread. We do roll the TLT spreads to mitigate this. If the TLT spread becomes worthless, we roll to a higher strike. This can mitigate most of the downside effect on the SPY portion. We’ve only backtested without rolling so the returns should be higher though I don’t count on it.  I also add some hedging if I feel it needs it. I have a signal to increase or decrease the ratio of SPY to TLT. This month we’re at 60/40.  We’ve just had a market decline from 208 to 200 and the trade is handling it quite well mostly due to the fact that I’ve staggered my entries over a week, I’ve used a ratio of 60/40 TLT to SPY and I’ve added some hedges.  If I hadn’t the trade would be down about 2.5% but instead it’s up around 10%.

Finally we have volatility trades related to earnings. This is a completely unrelated trading strategy based on the fact that volatility increases the closer you get to earnings. We use straddles and calendars to capture the increase.

 

That sums up our portfolio method for 2015.