Nothing new again today, I was getting a JTS buy signal when SPY was below 140.75 but I make it a rule to ignore intraday signals. (Signals are only valid on the close.) The JT Comp remains 50% long XIV.
Not sure what Monday will look like. If I had to guess, I'd say we are done going down and now it's time to bounce back up to test the 50-day next week. We'll see. I'm still holding a 25% XIV position.
Cheers!
Thanks J, have a great week-end.
ReplyDeleteGlad I sold all my longs and went to cash on Friday. Futures are just a little bit ugly...
DeleteFutures made a miraculous recovery, so Wednesday could be interesting trading...
DeleteFutures are up even more, so it looks like selling Friday wasn't such a good idea... figures :-(
DeleteFairly constructive action today, J, especially that premkt move. There's a nice inv H&S w/up-sloping NL, on ES 15min A/S that I like.
ReplyDeleteMkt's winding up for a doozey of a move, here. Statistically and chart-wise, my numbers/analysis says "up" is most likely, but, nothing's perfect and, if we break out of this 3-day consolidation to the downside, Sp500 1395 (-17pts lower) will come in a flash as they run the stops from the August consolidation. That'll be a good place to do another round of buying.
Hope XIV works out for ya.
I picked up some crude oil today. And shorted some TZA -- may as well benefit from the bleed in that puppy.
J, here's a nice little study, comparing the underlying index (Russell 2000) to TNA and TZA, to show the bleed. Over this 20-month period, the underlying index is perfectly flat from start to finish. But TNA is down about -35% and TZA is down about -60%.
ReplyDeletehttp://tinyurl.com/8spg7fa
That's some pretty serious bleed. Makes me want to build a short-only-TNA system. That is, go short TNA on every market close, and cover the next day at the open or B/E+1, whichever comes first. That's a 100% win rate system, if you are patient enough and only do a small portion of your account each trade, being willing to sit through some pain.
I wonder how many newbie investors/traders out there have no clue about the bleed that exists in TNA or (worse) in TZA and are sitting on them long-term? That's painful and expensive "tuition" .... LOL
ReplyDelete"That's some pretty serious bleed. Makes me want to build a short-only-TNA system. That is, go short TNA on every market close, and cover the next day at the open or B/E+1, whichever comes first. That's a 100% win rate system, if you are patient enough and only do a small portion of your account each trade, being willing to sit through some pain."
JKH, are you serious about this? Actually, it sounds interesting to me. Could you explain it a bit further (For example, I'm clearly missing something: why is it 100%)? And, if someone has the time and the capacity, it would be fascinating to backtest such a system.
Al, I'm perfectly serious.
ReplyDeleteIt's 100% because you can just sit and let it bleed (to get you to 100% win on every trade) every time you have a trade go against you. Take a look at the longer term chart of TZA and you will see a (very) serious trend down... The chart looks like a cross-section of an Olympic down-hill ski run. That's a serious back-wind at your favor. Split-adjusted that hemorrhaging PoS started trading in Dec 2008 and was over $1,300/share... it's now sixteen -- a -99% drop since inception! They keep reverse splitting it (1:5, then 1:3, which is 1:15 net, so far) because it keeps going down. I only play TZA longs lightly and only when the mkts are seriously in my favor. I much prefer to short TZA.
The only problem with such a system is holding the shares -- I guarantee you that you will have them called away from you any time the mkt is ready to make a solid run back up. The solution is to move to Rut Futs at those times and then re-short when you get shares back. So you'd have to manage the net position. On the flip side, you will also have a notice one or two days before every major market rally, by doing this. Bottom line: It's one of the few things out there that is truly a guaranteed winner, provided you (1) do not over-leverage yourself and (2) have patience to hold through some intra-hold drawdowns... both of which are my style.
You can backtest it in Excel, Al. Should take you about 30minutes to do that if you are savvy at Excel. But you don't even need to do that -- just look at that long-term chart. That says it all.
Note: If there is one skill that EVERY trader should know, it's how to use Excel to do simple back-testing (you can get historical data for free from yahoo Finance and many other places). That is worth far more than anything else you will do. And that is another thing I can guarantee you.
PS
DeleteWhen looking at such long-term charts, you simply MUST use log-scaling for Price.. not linear.
Another total PoS ETF is FAZ... you can easily build a 100% win-rate system there, too. It trade since 12/2008, same as TZA, but started at (now, split-adjusted $4,000/share) and is now 17.56.... a -99.6% drop in value. Perhaps the truest "turd" of all turds out there. Short with impunity! Just be prepared to have your shorts called from you the day (or two) before every major market rally.
DeleteThanks, JKH.
ReplyDeleteI have only traded the major emini futures, YM, ES, and NQ (and some GC, now that I think of it). If I recall, the RUT emini (I've forgotten the symbol) is not very liquid. Do I recall correctly and is that your experience?
The symbol is TF, correct?
ReplyDelete"The only problem with such a system is holding the shares -- I guarantee you that you will have them called away from you any time the mkt is ready to make a solid run back up. The solution is to move to Rut Futs at those times and then re-short when you get shares back. So you'd have to manage the net position. On the flip side, you will also have a notice one or two days before every major market rally, by doing this. Bottom line: It's one of the few things out there that is truly a guaranteed winner, provided you (1) do not over-leverage yourself and (2) have patience to hold through some intra-hold drawdowns... both of which are my style."
ReplyDeleteSo, in this strategy you're short TZA until your shares are called back, and then you go long TF? In other words, you're always on the long side. Am I correct in this.
This is my style too, and I'm really interested in paper trading this strategy for a while.
How about UVXY and SVXY? I think their decay rate is even worse.
ReplyDeleteA strategy there may be to short both at the open. Each has lost 1 % or more in value during the session 92 times in the last 100 trading days. Set a 1 % target and you'll have a good chance both will have closed out profitably by the end of day. If you're forced to hold overnight let the decay do it's work.
The next day you can choose to only short the one again that closed out the day before or to also double up on your open position.
This strategy has the advantage that you don't need to worry as much about interest you have to pay your broker for shorting.
To clarify: Each has lost 1 % or more in value from the open at some point during the session 92 times in the last 100 trading days.
ReplyDeleteJKH: Who is going to call your shares away? I can only imagine that happening if you sold puts against a short position, I do not think my broker will force me to cover unless I get into margin trouble.
Correction: I was assuming SVXY was the counterpart of UVXY but is is not nearly as leveraged and therefore the satistics do not apply for that. I cannot find an inverse etf for UVXY, but statistics for TZA/TNA are not bad either: Both have an 83% winrate.
ReplyDeleteThere are two strategies that seem to be at stake here.
ReplyDeleteThe first, as in JKH's first post, involves shorting TNA MOC and then covering the following morning on open or breakeven + 1.
The other appears to be to short TZA and just hold, buying TF if shares are called away.
JKH, assuming I have this right, do you see these as separate strategies?
Absolutely.
DeleteGuys... lemme try answering all yer questions.
ReplyDeleteYes, this is essentially a "long" strategy, betting up on the mkts (ie short bear funds).
Anyone who thinks shorts don't get called away from you (or you are refused getting shares to short when it is most opportune to short them) has not traded very long. This happens. Not always... but definitely enough to be annoying and it is a risk of any shorting system. But, of course, when it does, you know the next mkt move, so just switch to futs to have the same play.
Many of these leveraged ETFs bleed.. esp the bearish ones and the ones that are based on narrow sectors (e.g., Natural Gas). Marco, some that you mention, we've discussed here previously as particularly bad bleeders. Of course, this is not lost on the large firms and they tend to be aggressive shorters of these, so that is who yer competing against to get (and keep holding) shares to short of these. I've had 'em called away from me at IB, UBS, eTrade, and other firms over the years. And other traders I have known over the past decade+ have had it happen to them, too. Believe me, it happens. eTrade is particularly bad at even being able to get shares to short -- one reason I do not use them. IB has pretty good inventory, but I had my TNA shorts (from IB) pulled from me on 2/28, 4/4 and 4/5 of this year -- check out your charts to see what happened next.
When your TNA short is pulled from you, you can go short anything (NQ ES YM TF)... they all move in synch. TF is the most correlated, though, of course. Likewise when yer TZA short is pulled from you, go long any index e-Mini and yer fine. Mkts are highly correlated.
Yes, the TF is the Russell e-mini. Last I checked it was quite liquid. I find all the major e-minis (NQ TF ES YM) sufficiently liquid for my purposes.
Hope I got all yer questions, guys...
Now, to take advantage of this... theoretically, this is what you could do...
ReplyDeleteKeep an "inventory position" of, say, equal-dollar amounts of both TNA and TZA short. That is mkt neutral. While yer holding them, you get to accumulate the bleed in both, so you make a little profit over time. But, when you get the buy-in notice from your broker on one, you know that the mkts about to move and you know (from which is bought in) which way it's likely to go. That will likely catch a few major mkt moves every year... but it's a boring system, so not for you ADHD types.
JKH, please fill me in if my reasoning is incorrect. Let's say I am short TNA. My broker borrowed these shares from someone else who has an account with them. If these are called away from me I assume that would be because the other party wants to liquidate their long TNA position and my broker needs them back for that purpose. So if my short TNA are called away that would indicate a market move to the downside.
ReplyDeleteIf you keep both positions wouldn't you have to rebalance regularly? It may be easier to every now and then check with your broker which etf's are unavailable for shorting.
As for the "bleed strategy", there are quite some articles on the subject and generally the conclusion is that there is little edge to be found there. If there were wouldn't it be exploited by arbs right away?
Marco,
ReplyDeleteCorrect on first paragraph.
Rebalancing: Yes, you'd need to rebalance some, but I wouldn't say that'd be too often.. maybe once or twice a year. I'm not getting fussy. The balanced position is more to get heads-up on major mkt moves, frankly (ie when you get your shares called away from you). That's where the big money is.
You can find articles on most anything, arguing up/down on nearly everything. I do my own homework, and you should too. The math is the math. I read a lot, but 99% of what I read I find to be utterly useless, or flawed somehow. Short TNA/ShortTZA (or any other major bleeder ETF) works... and, yes, this is being exploited, definitely, which is one reason some (esp the low-grade eBrokers like eTurd) brokers cannot get shares to short of at least one side of these crap ETFs, except when you really don't want 'em.
Happy Sandy Day!... futs appear to be still open.
I just did a backtest on ETFreplay.com of a portfolio that is 50% short TNA and 50% short TZA.
ReplyDeleteSince Nov. 2008, the results are as follows:
CAGR: 18.3
Max DD: 38.52
During the same period, the results for SPY are:
CAGR: 12.6
Max DD: 28.61
I should have added that the test rebalanced quarterly.
ReplyDeleteThe results for FAS/FAZ are:
ReplyDeleteCAGR: 32.5
Maxx DD: 60.64
The drawdown is a huge Ouch.
FAS/FAZ is much better with monthly rebalancing:
ReplyDeleteCAGR: 51
Max DD: 39.8
The Max DD is still an ouch, but a somewhat attenuated one.
Here's an article on this strategy http://falkenblog.blogspot.com/2011/10/shorting-leveraged-etf-pairs.html.
ReplyDeleteAnother thing to consider is borrowing costs (as many of the comments in the above blog post point out).
Since nearly all the profit is given by the bear ETF, just short the bear ETF then, if you want MAXIMUM profits... That's a no-brainer, and obvious from the charts. Highly leveraged bear ETFs just suck this way. Like I said, "short with impunity".
DeleteUsing the pair as an indicator (as I had suggested), I wouldn't don't worry about gain. I'm happy to get it , though. And I don't mind tying up a tiny portion of an account to make double-digit returns on it. Name one other market indicator that pays you (let alone, double-digit returns) to hold it. So, you tie up about $10k, but get heads-up on some of the best, major market moves. Pretty sweet deal.
I suppose this is not for everyone. Tiny accounts (ie <$100k) should not try this.
Also, note that it is unfortunate that TNA / TZA started in the depths of the 2008 bear. Had they started a year earlier, I'd bet the returns for this paired idea would have been much better... and longer. Because then you'd have gotten a lot more bleed outta TNA. Run your numbers starting 11/2009, instead, and I'd bet they're better. Esp the DD. 2008 and 2009 need to be considered together or not at all. Can't pick one w/out the other.
Good points, JKH.
ReplyDeleteAs someone, I think, mentioned, couldn't the "indicator" function of this strategy be fulfilled by watching if shares of TNA or TZA are available for shorting. I don't know about other brokers, but IB shows you on your TWS if shares of a given equity are available for shorting. Is that what you're talking about, or is a broker calling in shorted shares not the same in terms of being a market indicator as not having shorts available for shorting?
It's a close second, but not the real thing. Sorry, as usual, there's no free lunch. Indeed, in this one, you have to put your nutz on the line (hold the actual shorts) and thus you have to get PAID (and make 18%-51% per year) to get that signal...roflmao....
ReplyDeleteThey took the futs down as expected on Sandy BS and I got more YM last night (being filled a tick below Friday's LOD... Thank god the futs stayed opne. ... already up nearly 100 pts on the news that Sandy was over-hyped... gee, what a surprise. Nothing like waking up to the smell of profits in the morning. Certainly up here in upstate NY, Sandy is a complete joke. We barely got any rain, and the winds were nominal for a typical Nor-easter.
Definitely, picking up some last night around 2330 and waking up to the futures being about even from Friday's close would make one happy...
DeleteHave you noticed that the normal markets tend to test the lows (and highs) from futures? If so, wouldn't that make one think Wednesday could be a big down day intra-day, then possibly recover?
Thanks, JKH.
DeleteIn your experience, on average, about how many times a year do TNA or TZA shorts get called back?
This is weird.. I posted a reply last night to you guys here, but it's not showing now this morning... I'll try it again.
ReplyDeleteRMI: We already did the re-test... I'd expect any re-tests now to push through. This is why, if yer a trader, you simply must watch the futures action. Sounds like yer doing that, so that's smart!
AL: a couple times.
They already pushed the YM through prior highs (in premkt). Just simple profit management, so I'll be flipping out some of the YM near the open because I already have about 200 pts profits on this last batch so why look a gift-horse in the mouth? If we gap up big and fade the gap, that will tell us the bears own this -- but I doubt they do.
What we do today depends entirely on redemptions of MF's. Last week was net redemptions. Now, w/the mkts having been closed for 2 days, MF's are screwed and have to do all their redemptions/investments today. And they get a lot of money (typically) in the end of the month from all the 401k plans out there. And they get more on the 1st, too. My bias is up. I'm betting on net investments.
33 posts to this blog script -- has to be a record.
Hurricane Sandy is turning out to be less bad than expected.. and the jobs numbers were good the other day. More reasons to be bullish. Besides, J's systems say we should be bullish -- you don't need anything more than that.
"Besides, J's systems say we should be bullish -- you don't need anything more than that."
DeleteThat's funny!
Thanks, JKH.
ReplyDeleteYou probably answered this when your post last night disappeared (actually, I saw the post # indicator go up but no new post appeared), but I had asked if you could say approximately how many times a year the short TNA/TZA market indicator (i.e., shorts being called back) kicked in on average. Also, do you have a sense of how accurate it is? Thanks.
Deadly accurate.
DeleteVery interesting. Now, on average, about how many times are these signals given?
DeleteAnd, btw, JKH, thanks for an intriguing idea.
You all have been busy here lately. I've been busy at work dealing with Sandy, but things are finally winding down. Phew.
ReplyDeleteGood discussion above. I'll have to read it all again before I can make any comments.
Speaking of comments 30+ is definitely a record here. :) Thanks all.
BTW, I'm thinking of buying AAPL with some of my capital. I'll go into more detail later.
It's all thanks to you, J.
ReplyDeleteAnd, do share your thoughts on Apple.
Any chanof a change today?
ReplyDeleteBought some AAPL Nov-20 580-strike calls today with the PE ratio in the 13s.
ReplyDeleteAnd also bought some AMGN.
ReplyDeleteJ, curious how you calculate contango for XIV. I think it is VIX futures 2 months ahead (currently 19.30) - front month VIX fut (18.65) = 0.65
ReplyDeleteThen divide that number by the front month * 100% = 3.5% Is that correct? This would imply that a higher VIX automatically leads to contango shrinking?