STX / WDC Pair....1.28.13

The way this idea got started was I went to a seminar run by a couple Oppenheimer whiz kids who manage about a gazillion dollars using O'Neil's Canslim approach (Investors' Business Daily).  The focus of discussion truned to Seagate (STX) and Western Digital (WDC), who between them control over 85% of the disk drive business. Toshiba has a minor role in the business but these 2 have a virtually lock on the industry.  Whether they collude on pricing within this almost monopolistic milieu is subject to speculation but they seldom get far afield from one another.  I decided to take a look using the MO2 pairs analysis.

As usual, this is a 6 month performance report and, as expected, the correlation is very high..92%.  What's interesting to me is that there are windows of opportunity within this pair (4 trades in 6 months that have produced respectable returns with little risk exposure.  The center chart (yellow line) tracking the rolling log ratio of these 2 stocks shows clear support and resistance levels.  They don't get hit very often...30 days is the expected duration of the trade...but when they fire the results are very predictable.  Although it would be nice to see more data points along the equity curve the last thing we want to do is try and force trades out of this pair...we just need to take what it gives us and then move on.
This is an unusual pair, to be sure, but it provides a sweet niche trade most traders never discover.
I'll continue to track this pair as part of the ongoing work in progress on the pair trading portfolio.