Why is that? Because this is a great pair trade and over the next couple Mondays I'll try and show you why.
We actually look at 6 ETFs, but only to gauge the current short term momentum in the market...either bearish or bullish. If bullish we're long QQQ (or QQQ calls). If bearish we're long SH (or SH calls). These are short term trades based on the reliability of the QQQ/SH pair's inverse behavior. When that behavior gets out of balance we avoid the trades. Note from the "Pair Skew" metric how that balance has performed over the past 30 days and the DN NAV chart above shows the skew even clearer.
Note that over our 4 year study period the QQQ/SH pair had an average return of 2.28%....which is a good thing because we're not using this as an investment vehicle but a market neutral setup. The RM version had an average return of only .58% over the same 4 year period... a very tight alignment. We can actually improve on these results by changing the allocations from 1:1 to something more efficient..as we will see in future explorations of the pair model. At the same time we can use different ETFs to gauge market momentum and that will also be examined in detail. The beauty of this approach is that we REALLY don't care whether the market is bearish or bullish, we need some guidance from the momentum rankings to keep in alignment with the trend.
For now market momentum remains with the bears as we await the result of tomorrow's election.
Watching last night's "60 Minutes" segment on why the US Senate is gridlocked is enough to drive a sane person crazy...and more bad news...there's no end in sight to this version of a 3 Stooges movie...as us poor
civilians are left to suffer the consequences of a totally dysfunctional Congress.
