Travels and Trades

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.

 

 

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.

The big news today was waiting for the ECJ to rule whether QE would be legal to implement by the ECB. They said at 830 GMT that it may be legal. Thanks for that. This could ignite the markets. But likely we wait till jan 22 when the ecb meeting will reveal intentions. Draghi says risk of deflation in the eu is not likely though more likely than last year.

One of my 13f clone picks from baupost is having issues (OCN). Down 35 percent in one day on news that California might pull its mortgage license. Annoying and why it pays to have small positions in these things. I am looking at ticker ALFA as a replacement to 13f cloning.

Glad to be getting home. I think I’ve accomplished all the EU traveling I came to Malta to do. Especially the Med. The next 6 months will include just a Cayman trip and that’s about it. Time to get back to heavy work with my day job.

We had a tour booked today that we ditched on. Wanted to relax more before departing tomorrow and it was a nine hour tour. We decided to venture in and check out the castle and shopping district and grab some Napoli pizza.

Been reading a lot on managed futures trading as an eventual diversification strategy and also just out of interest. It’s completely unrelated to equities (no correlation) so it does interest me and the rules and mechanisms behind it are quite mechanical which I like. They’re momentum based.

We’re in Palermo today, will be trying to catch a hop on hop off bus and maybe see the crypts.

 

Not much to report on the markets. Futures are up.  I might rebalance a bit today. Back home on Wednesday, looking forward to it.

We had a sea day yesterday and spent a lot of time laying in bed reading and watching the news on the Paris attacks.

The markets started off higher in the am with a positive job report but then lost a lot back closing at 204.19. Is the bounce over? Are we heading to test 197 (Dec lows)? Or is this going to continue up? Who knows. We just need to be positioned appropriately for any event. The volatility collapse and stability of TLT really put our spy/TLT pair trade in the profit zone. All is going well RIGHT NOW in this volatile environment.  However, I do have concerns if we start heading down again as then I fear that this will be an actual correction. The bearish reversal bar on Friday is not a great bar to see. (Bearish reversal = open higher, falls, and closes red). We just went down hit 199, it bounced, bulls feel relieved, but if pressure mounts again, we’ll have a lot of towels being thrown in as this marks a turn in the general momentum of the market, the end of the V rebounds. There will be less defence and more fear and it’ll likely go down to test the Dec lows. That’s a failed rebound and the march to the Dec lows would affect our SPY/TLT trade. If we start going down again on Monday, I might add more TLT to the spreads. We’re up about 7% on that trade so far. Aiming for 20-25% but are at risk if a significant downtrend occurs.  We’re up a lot on the momentum portion and down a bit on the protector due to the whipsaw experienced.

With the momentum portion of our portfolio, we look at 15 ETFs that include bonds, small caps, large caps, REITs, treasuries, foreign treasuries and equities and some commodities. We take the the top performing three from the previous month so long as they are above their moving average.  We rotate once a month. In weaker periods we end up in treasuries and bonds and in stronger periods, we naturally end up in equities.  This rotation system provides a 15% return with max drawdown of about 10% measured from 1972 to present. Quite good numbers. We miss all of the big draw down periods. Our momentum portfolio is a nice addition to our protector portfolios, bond rotation and SPY/TLT pair trades.

Sardinia was OK, the segway tour was awesome but the city of Cagliari was so-so. Not a whole lot of interest besides this 13th century tower (the building that looks like its a new building under construction :))  This was used as a prison and also as a place to hang the severed heads from the executed.

The pre market is up a boat load on comments from the euro zone on Implementing QE. We will likely look at taking off our hedge if spy breaks 205. It cost us a bit but it was worth the protection. The TLT hedge we implemented will still actually profit as TLT remains high despite the rise. Our trade is now doing well, Actually our entire portfolio is. It’s neat, our portfolio responds to all upside and barely falls on downside. Can’t ask for more than that. The most sensitive portion to downside is the spy TLT pair trade. Our protector portfolios experience downside when the market moves down but only temporarily. It has challenges only in whipsaw environments that are prolonged, though the most complicated part of that strategy is how to mitigate whipsaw risk. It’s the part I worked on for years (how to sell the weekly puts etc). I had tried so many things in back tests. Then a member of a forum had a brilliant idea that really helped solve the whipsaw issue. I took his idea and made it better. It’s kind of what I do. Leech other ideas and make them better 🙂

Valencia is nice. The streets are littered with orange trees. See the picture below. Not much of interest to post really. We just walked around. I’m a fan of Spain. We may do 6 months here in July when our lease is up before heading back to Cayman. Depends on a few things re business. But would be nice to experience the mainland before heading back to our dream world in cayman.

Market open Update (5:22pm)

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.  We’re setup quite well for any directional move (up or down).  As of writing this, SPY is at 201.15 so I am glad I did adjust the portfolios a bit. I was uncomfortable with SPY at 199.25 yesterday. So if it should happen to fall again, I’ll be better setup.

Current Holdings

SPY/TLT  (Feb 20th Expiry) – Credit Spread Pair Trade

205/200 SPY  & 123/118 TLT

204/199 SPY & 123/118 TLT

203/198 SPY & 124/119 TLT

202/197 SPY & 125/120 TLT

201/196 SPY & 125/120 TLT

199/194 SPY & 126/121 TLT

Additional Hedge

TLT 127/121 (10% of portfolio)

SPY 199/197 Jan 30th Debit Spread (20% of portfolio)

Momentum

50% TLT and 50% VNQ

Volatility Trading

NFLX Calendar spreads

GOOG Calendar spreads

Normal Protector Portfolio

Short weekly SPY Puts (instead of RSP) + Hedge

Alpha Protector Portfolio

**Secret sauce** 🙂  I use about 3-4 different things to obtain additional alpha. I don’t list them here. They’re my only secret sauce. They’re a mix of momentum picks, mechanical investing and quantitative analysis. They’ve got the same market risk in a bear or correction so our insurance will protect them.

Market Commentary/Summary

So the volatility continued into Tuesday. The spy fell to ~199.2 from 203 and rebounded to 201 intraday only to close at ~200. Our spy TLT trade and protector portfolio is suffering a bit and I added a hedge of about 20% jan 30 debit spread and an additional bit of TLT. Overall though it’s doing well considering the huge 5 percent movement in the markets since NYE. Our momentum plays have been a godsend hedge to our protector portfolios. The entire combination of strategies has proved to be handling the decline well. It’s a bit unfortunate we had a 5 percent decline the exact day we started but hey it was a nice test and I think we’re even despite. The momentum portion is up a lot and is responsible for the result. I missed entry on one portion of the momentum picks for the month but successfully added two of three ie TLT and VNQ (I missed LQD on New Years) And those have compensated for the temporary loss on the protector and spy TLT pair portion. It is likely that we will bounce here and then see another let down probably to 197. The downward momentum is strong. However, it is also possible we have another v recovery like has been the theme as of late. Today the futures point to a bounce. They are up about 12 points on the es.

We are in Barcelona today. I’ve spent about 20 days here over all in my life and can safely say it would be the city I’d vote as my favorite place to spend time. IE I could live here more than any other city in Europe.

We visited eze and Monaco rock yesterday.  Eze is a medieval town outside of Monaco which reminds me of an extremely miniature castle version of Mdina.  It’s got shops and restaurants nestled within the stone.  We only had an hour there so we enjoyed some Provence rose and headed by bus to Monaco rock which is the old Monaco district where the palace and church are.  Also where Grace  Kelly is buried.  She died untimely on the roads of Monaco many years ago (she was married to prince Rainer). A tidbit:  Monaco means monk.  The reason why it’s monk is because of Grimaldi who disguised himself as a monk and knocked on a monastery, slaughtered it’s inhabitants and took over the area.  For some reason this seems celebrated here.  Whatever.

Today we visit Sanary and le Castellet

The market had its first four day losing streak since 2013.  It was a solid 2 percent down day.  It’s approaching over sold but the downward RSI is strong so we should expect more down ahead after perhaps a little bounce.  You need some positive divergence in the RSI before reaching a bottom. There is none -yet.  We’ve seen violent unrelenting bounces before without divergence but it feels different this time around.  A lot more geopolitical events now (Greek exit, insanely falling oil, euro/usd fall)

Our spy/TLT trade isn’t doing terrible considering but it’s still down.  As time passes and upon any VIX reduction and upwards move we should profit well.  I  entered at multiple times and as well even some was entered yesterday during the strong down move. We’ve got 205-200, 204-199, 203-198, 202-198 and 199-194 now.   So we added ours all the way down.  It’s better than having entered them all at 205-200.  TLT is acting well as the pair trade.  Over all we should do well enough.  I may add 10 percent more TLT On a bounce in spy and fall in TLT as a slight hedge.

 

We’re in Monaco. We’ll be touring Eze village and Monaco Rock today.  We left Rome on the 3rd and stopped in Livorno yesterday, however, we never got off the ship, so there is nothing to report on Livorno. We used yesterday to relax and catch up. The kids spent probably 7-8 total hours in the kids centre, which was awesome and they loved it. They didn’t want to leave, they even wanted to sleep there. That was an unexpected perk of the ship. We had no idea that the kid center was that good or that you could leave your kids there while on excursions or while at dinner, breakfast or lunch. A definite perk and while I wouldn’t use it all the time, it’s nice to use it sometimes.  I spent the day kidless – reading, working out and relaxing.

Rome was meh, not a fan. It’s kind of a shit hole.  We ended up staying at an Airbnb that was a distance away from the city center but we found a cool neighborhood in walking distance that we spent most of our time at. We didn’t find that neighborhood until after NYE and we never went out for NYE because it was below 0 temperatures and we were tired. Plus, we had no idea where we were in Rome and all around us was a complete ghost town. We heard the bus took 45 min so we just ditched out on the idea and watched “A Midnight in Paris” and drank GTs instead.  The next day we went into town and were accosted non-stop by those street vendors that try to sell you magic bouncing balls and now “selfie sticks”.  I’m not kidding there has to be hundreds of these guys in the Colosseum area alone. Every few feet you’re nearly hit by these guys pointing their shitty sticks at you. Ash was about 2 inches from one hitting her in the eye. It’s unpleasant. Rome is unpleasant. Graffiti is everywhere and you know what they say “A city gets the graffiti it deserves”. I think that fits Rome.  Don’t want to come back. I’ve spent probably 15 full days here on various trips and I’ve never liked it. Venice is the same.  Probably the only two cities I’d call shit holes.

Yesterday, I bought a book called Dual Momentum that won best investing book of the year.  I’ve been reading a lot about momentum trading (maybe it should be called rotational investing?) lately (Faber etc) and am convinced of its merits.  Though the returns are only slightly higher on a per annum basis (expect 15-17% per annum)  the reduced risk, compounding benefits and drastically reduced drawdowns make it epically better.  We’re using some momentum in our portfolio constructions.  The key is removing large draw downs and with that you can compound year over year so much more efficiently. We’ll be rotating the best 3 out of a set of 15 ETFs on a monthly basis with our momentum strategy.  Our Protector Alpha portfolio also has momentum built into its mechanism.

Trading is going OK, I am trying to get all the trades entered for the month of January but had a bit of an issue with IB on Friday when I tried to enter them at open.  I had delayed quotes (no idea why, some sort of bug) and couldn’t update the settings in the IB account center because it was ALSO down for a few hours. Essentially I was flying blind and the market moved a bunch (down).  I couldn’t see pricing and I got on the ringer with IB but by the time that was all corrected, the market fell a solid 1%. I had opportunity to get way better pricing on some insurance rolls that I missed out on. I also had some better pricing on TLT that I missed out on. I would have entered all of those at market open but this prevented me from doing so.  Ah well. It cost a bit but it is part of the business.  IB account manager being down was out of my control.  Though, I doubt there is any lasting loss as I’ll enter the rest on a slight up day and I rolled to even lower strikes. I mean, I did do some market orders just didn’t get everything.  Either way, history shows that there is little difference to the day you enter (1st day of the month or 8th) so I am not so worried about the TLT and bond purchase miss but I am annoyed by the Rolls.  It’ll probably end up being net zero (or a small loss) but still quite annoying.

At the time of this writing, the ES futures are quite volatile, they’re up right now but had reached about 2037 before rebounding to 2048. Shanghai index surged to five year highs which seems to have caused the bounce. Good data in China.