LM & TAQK Updates + T2 Lab...1.3.13

Here are the year end updates for the Tactical Allocation models...LM and TAQK.  Note that the 2012 SPY benchmark gain is shown as 15.99% (higher than 13.46% simple gains)..that's because it includes 2.4% in dividend payouts.

The RM versions went to a VESTED position at the end of  1.2.13 and picked up a little after hours gains.

TLT has been hit pretty hard the past 2 trading days...as can be seen in the share adjustment metrics.  This looks like a screaming buy but the technicals have to be tempered with the odds for a continued equities push.  Bill Gross (PIMCO), arguably the largest bond trader in the world, noted that the FED currently buys 80% of issued Treasuries.  If the FED decides to divest some of those positions or pull back on that level of purchase then we may see TLT fall back to target $97 levels as equities blow the doors off.  It could happen.

From the T2 lab here's a little study using the IShares bond ETF AGG as a benchmark and then building 2 separate really low risk models that still kick out twice the return of AGG... one with QQQ and one without.  The results may surprise you and with the T2 software you can explore other variations using other components....remember..just because there are 11 slots available doesn't mean you have to use them all.
Of course the momentum metrics are irrelevant for this study but the lower 2 year comparison chart shows there are still opportunities to engage our RSQ and/or P6 stops to improve the returns.

I know, I know..the Top# in the lower study still says "5".  However, since there are only 4 ETFs T2 only calculates and adjusts for that number.

T2 Alpha stock porfolio...1.2.13

I'm postponing the TAQK nd LM updates until Thursday while the metrics get adjusted for 2013.
As of 60 minutes in today the SPY is up 420 points in the last 2 days, while bonds are showing moderate weakness. Gold is also in a run up and our equities biased LM model is likely to show gains relative to TAQK in tomorrow's post.  AAPL is up another 3% today, helping to push QQQ to almost equal gains.
On the volatility front VIX is down 13%, contributing to a 22% decline in the past 2 trading days.

One of the sites I frequent is Seeking Alpha.  I use to contribute articles but the SA editorial team determined by submissions were "too technical" for their average reader to understand.  Nuff said.
Here's their stock picks for a 2013 model portfolio.
I've plugged their "Starting Lineup" portfolio into T2 just for fun.  We're not using LNCO because its only been live for 2 months...not long enough to develop metrics.  Plus, I've used SPY as the benchmark which, because of the way T2 works, may actually become a rank 1 or 2 sometime during the year.
Again, this is just for fun.  You can see how the top 1, 2, 3, etc of this portfolio pan out relative to our default model. And, you can play around with this thing and enter your own favorite stocks to see how they have fared relative to the Alpha picks.

MO2 Possibilities...12.31.12

Here are a few positively correlated pairs using the MO2 software to analyze potential trades.  I'm focusing on the SPYDER sector ETFs, previously discussed, to explore another route for detecting impending momentum both within the larger T2 default model and as a stand alone trading strategy.  I've also included a GE/QQQ pair that shows promise and long time readers know my special interest in GE as a trading instrument...I like it.

  Now a couple SPYDER pairs:

As you can see... we can mix and match the sector SPYDERS to both confirm current momentum and to see how that momentum is related to the other sectors.  This is a good edge to have when looking at potential trades and, here's a little bonus, we get quantified forecast of how long the current trade should last before risk overcomes reward. 
Now not all pairs look as attractive as this bunch.  That upsloping continuous equity curve (RSQ line) (orange line) is actually the most important metric to consider when taking these trades.  If current equity is below that line then something either technical or fundamental has gone awry and its best to just stand back from the trade until the RSQ and trade equity get back in line.
There's a lot more flesh to put on these pair bones to make it a whole system but these examples should give an indication of the possibilities.

90 minutes in today...16 hours until 2013 and the Congress  looks unable to reach a meaningful compromise on the pending fiscal mess. We're seeing some volume pops this morning and attempts at a rally but one of the NYSE floor traders on CNBC called it a "Fools Rally" that should be sold, not bought.  We shall see.

MO2 Pairs...GDX / SLV...12,28.12

Looking forward to 2013 there may be some tough going so we need to consider Plan B.  Despite all the economy cheerleaders pounding the table that 2013 will be a go-go year there's a lot of evidence to support a contrarian viewpoint.
One way to work around the risk system is with a pairs approach...which is a hedging strategy with definable risks and predictable odds. 

In the past we've mostly focused on inverse pairs such as QQQ / SH, which is essentially either a double long or a double short. In the coming weeks we'll look at more arbitrage based pairs where we are looking for the strongest, highest momentum side of a correlated pair. 
In the case above MO2 looks at the relationship between silver and the gold miners (SLV/ GDX).  This is one of those boutique pairs that combine a fundamental relationship (metals) with technical price alignments in response to the world economies 
The lookback is limited to 6 months but the results are a good example of the profile we're looking for...a solidly upslope equity curve (orange line) and a clear definition of trading thresholds (yellow line).
The duration of the average trade is 29 days, which means you may see some drawdown along the way. 
Again, this is just an example.  We'll look at some other compelling pairs in the New Year.

VIX >20...12.27.12

Today's news centers on the VIX rising above 20 for the first time since July 23.  This is a weekly chart with a few of my favorite technical indicators.  For active traders the 2 SMA8 lines on the chart are of the high and the low...creating a support resistance channel that is amazingly reliable fro reading new trend breakouts.  Note where the VIX is right now.
The chart has a yellow line overlay showing how TLT has historically reacted to the VIX and the point of interest is that TLT has never resolved back to the VIX baseline (like April 2011). This is a stark graphic view of the potential bond collapse that is contributing to market nervousness.
Of course things could turn around in an instant but the odds are looking increasingly with the bears.
Here's one doomsayer's comment.
And, just for reference here's a look at the SPY/TLT pair study supporting the bears once more.
Those of you that have the daily Market Rewind subscription can replicate these pair studies.

LM and TAQK Updates...12.26.12

Software Updates:   VTV version 4 was sent out last Friday and the updated T2 version 4 was sent out Sunday so all readers should have received the package you signed up for.  If you haven't received the files please let me know.....   ETFmosaic@aol.com

The RM (Risk Managed) versions of both the LM and TAQK models went back to CASH on Monday's close.  Monday was technically speaking a non-event with extremely low volume and shortened hours. Historically, such days tend to be bullish and, coupled with the Santa effect, was the generally expected result.  Which only goes to show that Hope is not a strategy. Gold and bonds continue to lag equities, even in the face of overall market weakness.  The SPY TrendX chart at the right side panel shows where we are and where we're likely to go if the markets continue their current trend...back to previous lows.

The NYAD is in a solid sell off this morning (8 am PST) but still holding up fairly well at .81.  With shortened trading on Monday and the markets closed Tuesday the end of this month could be a real firecracker.

It's looking more and more like no fiscal cliff solution solution will be forthcoming by the end of the year and the big push now is for a stop gap measure to at least preserve the status quo.  Its still a wait and see game.

For those tracking LM and TAQK ...Friday is rebalance day, when we realign position sizing to reflect the model allocations.

MO2 View... 12.24.12

As we move forward into the new year there will be an increased focus on pair trading (MO2) research...both inverse pairs (such as QQQ/SH) and correlated pairs such as (AAPL/IBM). There's a reason that some of the largest proprietary trading shops (like Bright Brothers) use pair trading as their main trading mode when not playing arbitrage on the open and the close....it provides much better odds for success than simply trying to guess directional moves.

MO2 has a live data feed and here's a look at today's QQQ/SH signal...also the focus of our VTV model, but obviously using an entirely different set of metrics to analyze the trade potential.  We're into the QQQ short trade 7 days now and with a predicted optimal excursion of 9 days, it's getting close to exit time.
This optimal time window ("N- Days") is critical and the failure of the trades ending on 08/30 and 12/05 can be traced directly to dallying too long and not cutting the trade off after 9 days.

As far as the near term picture for the markets...we have the last day of the month bullish potential fast approaching versus the realization that we may go over the the fiscal cliff.  If there is ANY remedy to the crisis its likely to be stop gap and not far ranging or long term....so the markets will likely continue to climb the wall of worry. 

We continue to be in a cautious mood and today's action where QQQ and TLT are both in the red reflects the ongoing technical confusion in the markets