Daily Commentary - Posted on Friday, August 13, 2010, 1:11 PM GMT +1
SMH vs. XRT on AUG. 13, 2010
One of those favorable short-term reversal opportunities ( see Pairs Trading (ETFs) ) may be provided on today’s session (August 13, 2010), assumed one would’ve bought the pair SMH vs. XRT (Semiconductor HOLRDS. vs. S&P 500 Retail SPDR) on close of the last session (August 12, 2010).
During the last couple of sessions, the SMH more or less posted a waterfall decline, losing -2.44%, -2.47% and -1.81% (adjusted for dividend and cash payments) on the last three trading days, while the XRT out-performed the SMH by a wide margin.
The table below shows the respective performance metrics (since 07/01/2006 due to the XRT‘s inception in June 2006) for the pair SMH vs. XRT, assumed one would’ve bought (is equivalent to long SMH and short XRT in the right proportion, means equal money amounts (number of shares in each ETF = 100% net asset value / share price)) on close of a session when,
- #1 the SMH under-performed the XRT by at least -2.25% on the close, and the 4-day CCI (Commodity Channel Index, w/ closing prices used for the ‘typical price‘) of the pair closed at -133 (lowest level possible),
- #2 the SMH under-performed the XRT by at least -2.25% on the close, and under-performed XRT on the last three consecutive sessions as well,
- #3 the SMH under-performed the XRT by at least -2.25% on the close, and under-performed the QQQQ by at least -1.0% on the same session,
- #4 the SMH under-performed the XRT by at least -2.25% on the close (no additional condition).
It is especially interesting to note that historically there is a significantly above-average probability (and odds as well) that the SMH will turn the tables and out-perform the XRT on the then following session (like today), regularly by a wide margin. Since 07/01/2006 there were 70 occurrences where the SMH under-performed the XRT by at least -2.25%, and on 51 out of those 70 occurrences (73.63%) the SMH out-performed the XRT on the then following session (like today, August 13, 2010) for a respectable median profit (considering all 70 trades) of +0.84%.
The second table below shows all historical occurrences (since 07/01/2006) and the strategies (#4) performance on close of the then following session assumed one would’ve bought the pair on the previous close where the signal (the SMH had under-performed the XRT by at least -2.25% on the close) had been triggered.
to be continued …
Remarks: Due to their conceptual scope – and if not explicitely stated otherwise –, all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ –, do not use leverage (e.g. leveraged ETFs) – but a marginable account is mandatory –, do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility) , do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).
Disclaimer: Long SMH and short XRT at time of writing.
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