Friday, October 09, 2009

Qs Pair Basket - Part 4

Continuing the Qs pair basket study, I'm looking at 2 different themes today.
With the DIG and UNG Qs pairs I wanted to highlight the correlation between the differential beta and the number of trades for these 2 pairs.
Note that the lookback (N) periods are not dramatically different, as might be expected.
Also of interest, the equity curve position relative to the R2 slope for both charts is supportive of maintaining these pairs in our Qs basket.

Here's a little different spin . . using a sector ETF . .IYT (transports) versus a sector component stock EXPD to enhance the pairs net return. With the EXPD showing twice the beta of the IYT relative to the Qs, we would expect a bit more volatility and we're not disappointed.
EXPD trades on a 3 day lookback whereas IYT trades on a 5 day cycle. And the total number of trades is 40 with EXPD as opposed to 10 for IYT. Net return from the EXPD is about 50% higher than the IYT.
The caution with these 2 pairs is that the equity curve has fallen below the R2 slope producing negative returns on the last 2 IYT trades and from a risk management perspective we should postpone entering any new trades until the hypothetical equity curve once again turns positive.
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