Today's pairs study is a little departure as it reviews how GE (a stock) trades against XLF versus its steroids driven version FAS.
Those who have followed me for a while know I actively trade GE, one of the very few stocks that I include in my portfolio.
I like GE as a trading vehicle for several reasons.
...It's a close proxy for overall market momentum and sentiment built into one product.
...It's a financial and a tech stock, although more responsive to the financials than tech.
...It's got tremendous daily volume, often exceeding the Qs.
...The NYAD tracks GE like radar and I've posted several studies under the HOW I TRADE right blog panel.
...GE reacts positively to VIX crosses on 1 & 2 minute bars as shown on the VIXEN studies.
Just to establish a pairs correlation between GE and the financials I ran XLF as a acid test, with a resultant correlation and P&L both in the mid 80s . . a good risk/reward IMHO. The optimized trade cycle period is 17 days, a little long for my comfort level, but that's just me.
When applied to shorter time frames such as 10-60 minute bars, the trading landscape changes considerably to the favorable.
Fast forward to the GE/FAS pair. These prospects really look encouraging as we now have 100% correlation and a handsome 262% P&L. Perhaps as expected, the trade volatility (frequency) has been compressed to 2 days. I like that.
As with the GE/XLF model additional testing of shorter term time frames is required to validate this pair as a viable daytrading application. The possibilities are . . interesting, to say the least.