StockViz – Page 105 – Invest Without Emotions

Using Momentum to Short Butterflies

shyam July 11, 2015

Turning Momentum’s primary weakness into strength

The biggest problem with any trend-following strategy is sudden reversals in trend. This fits nicely into the biggest problem with selling butterflies – that the underlying stays where it is. One thing that momentum stocks guarantee is that they will move big.

Our earlier attempts at developing a mechanical short-call butterfly strategy for the NIFTY failed because there would be months when the NIFTY would just end flat for expire very close to where it started after bouncing all over the place. Let’s see if using single-stock options overcomes this problem.

A quick back-test

In order to hedge our bets, we consider only the top 3 and the bottom 3 stocks in our momentum universe. And then we apply a liquidity filter to ensure that we can actually carry out the trades. Trades are entered 10 days after expiry and held till expiry. No stop-loss is applied.

Top

Bottom

Combined

Conclusion

Using momentum to drive a short-call butterfly strategy holds promise. We have created a Theme for it – Shattered – to help traders access this strategy.

Categories Investing Insight, Your Money Tags butterfly, momentum, options

Short Butterflies with a Delayed Fuse

shyam July 11, 2015

Delayed Entry

In our previous post, we saw how a mechanical expiry-to-expiry short-call NIFTY butterfly with a stop-loss significantly outperformed a non-stop-loss strategy. However, the odds that a stop-loss would be triggered was almost 50%.

In our introductory post on butterflies, we had noted how the strategy P&L gets “pulled” as we get closer to expiry. This implies that during the first half of the trade, the position sits idle. However, the underlying NIFTY index could have already made its move out of the wings and could be on its way back to the center. To avoid this, we can delay entry until, say, 10 days have passed since expiry.

Returns with stop-loss and delayed entry

The odds of a stop-loss being hit remained the same. Even though the total return improved, when you look at the yearly rollups, the hit-rates are sub-par.

Conclusion

Although on the face of it, selling butterflies on the NIFTY sounds attractive – NIFTY is a volatile index and a rising NIFTY will make the moves required for a profitable trade lower – a mechanical backtest did not lead to a strategy that could be applied on an on-going basis.

Categories Investing Insight, Your Money Tags butterfly, NIFTY, options

Weekly Recap: The Side-Effect of Socialism

shyam July 11, 2015July 11, 2015

world.2015-07-03.2015-07-10

Equities

Major
DAX(DEU)	+2.33%
CAC(FRA)	+1.97%
UKX(GBR)	+1.33%
NKY(JPN)	-3.70%
SPX(USA)	-0.01%

MINTs
JCI(IDN)	-2.49%
INMEX(MEX)	-0.35%
NGSEINDX(NGA)	-2.49%
XU030(TUR)	+2.04%

BRICS
IBOV(BRA)	-0.03%
SHCOMP(CHN)	+5.18%
NIFTY(IND)	-1.47%
INDEXCF(RUS)	-0.47%
TOP40(ZAF)	-0.30%

Commodities

Energy
WTI Crude Oil	-4.88%
Brent Crude Oil	-3.01%
Ethanol	+1.60%
Heating Oil	-3.34%
Natural Gas	+0.11%
RBOB Gasoline	+1.27%

Metals
Gold 100oz	-0.63%
Palladium	-4.98%
Copper	-2.67%
Platinum	-4.71%
Silver 5000oz	+0.00%

Currencies

USDEUR:-0.53% USDJPY:+0.00%

MINTs
USDIDR(IDN)	-0.04%
USDMXN(MEX)	-0.03%
USDNGN(NGA)	-0.75%
USDTRY(TUR)	-0.90%

BRICS
USDBRL(BRA)	+0.72%
USDCNY(CHN)	+0.06%
USDINR(IND)	-0.06%
USDRUB(RUS)	+0.93%
USDZAR(ZAF)	+1.10%

Agricultural
Coffee (Robusta)	+0.16%
Soybean Meal	+2.27%
Soybeans	-0.19%
Sugar #11	+0.98%
Wheat	-2.13%
White Sugar	+0.59%
Cattle	-2.51%
Cocoa	+1.16%
Coffee (Arabica)	-2.38%
Cotton	-2.92%
Feeder Cattle	-2.73%
Orange Juice	+3.84%
Corn	+1.55%
Lean Hogs	+0.03%
Lumber	+2.32%

Credit Indices

Index	Change
Markit CDX EM	-0.81%
Markit CDX NA HY	-0.81%
Markit CDX NA IG	+5.25%
Markit iTraxx Asia ex-Japan IG	+11.27%
Markit iTraxx Australia	+11.48%
Markit iTraxx Europe	+7.27%
Markit iTraxx Europe Crossover	+23.03%
Markit iTraxx Japan	+7.04%
Markit iTraxx SovX Western Europe	+2.68%
Markit LCDX (Loan CDS)	+0.02%
Markit MCDX (Municipal CDS)	+1.76%

I think the market has had enough of Greece and China. The next few weeks are going to be all about earnings and how badly companies are going to disappoint investors…

Index Returns

For a deeper dive into indices, check out our weekly Index Update.

Market Cap Decile Performance

Decile	Mkt. Cap.	Adv/Decl
1 (micro)	+7.34%	77/57
2	+6.18%	79/54
3	+7.31%	77/57
4	+5.66%	77/56
5	+4.21%	74/59
6	+2.25%	67/67
7	+1.04%	71/62
8	+1.12%	73/61
9	+0.60%	63/70
10 (mega)	-1.05%	76/58

Large caps bled but midcaps seemed to buck the trend…

Top Winners and Losers

UNIONBANK	+5.35%
RCOM	+5.37%
CROMPGREAV	+12.68%
VEDL	-14.28%
CAIRN	-7.86%
TATAMOTORS	-7.21%

Tata Motors got pummelled by China worries.

ETF Performance

INFRABEES	+2.48%
PSUBNKBEES	+1.78%
JUNIORBEES	+0.98%
BANKBEES	+0.31%
GOLDBEES	+0.13%
NIFTYBEES	-0.90%
CPSEETF	-1.82%

Who is buying PSU banks?

Yield Curve

Thought for the weekend

The absence of free markets leads to competition for the market, which leads to competition for political office, which leads to the corruption of politics. That’s the basic story of crony capitalism — a side-effect of socialism.

Source: Socialism, Competition and Politicians

Categories Your Money Tags weekly

Index Update 11.07.2015

stockviz July 11, 2015July 11, 2015

MOMENTUM

We run our proprietary momentum scoring algorithm on indices just like we do on stocks. You can use the momentum scores of sub-indices to get a sense for which sectors have the wind on their backs and those that are facing headwinds.

Traders can pick their longs in sectors with high short-term momentum and their shorts in sectors with low momentum. Investors can use the longer lookback scores to position themselves using our re-factored index Themes.

You can see how the momentum algorithm has performed on individual stocks here.

Here are the best and the worst sub-indices:

Relative Strength Spread

Refactored Index Performance

50-day performance, from May 04, 2015 through July 10, 2015:

Equally Weighted		Market Cap. Weighted
CNX PHARMA (EQUAL)	+19.53%	CNX PHARMA (CAP)	+8.18%
CNX FMCG (EQUAL)	+5.71%	CNX MEDIA (CAP)	+4.86%
CNX CONSUMPTION (EQUAL)	+4.31%	CNX INFRA (CAP)	+3.67%
CNX MEDIA (EQUAL)	+2.51%	CNX CONSUMPTION (CAP)	+2.44%
CPSE INDEX (EQUAL)	+2.38%	CNX FINANCE (CAP)	+2.43%
CNX MNC (EQUAL)	+1.85%	CNX ENERGY (CAP)	+1.34%
CNX AUTO (EQUAL)	+1.67%	CNX MNC (CAP)	+1.33%
NSE QUALITY 30 (EQUAL)	+1.49%	CNX BANK (CAP)	+1.05%
NI15 (EQUAL)	+1.42%	CNX SERVICE (CAP)	-0.13%
CNX FINANCE (EQUAL)	+1.07%	CNX FMCG (CAP)	-0.17%
CNX PSE (EQUAL)	-0.94%	NV20 (CAP)	-0.58%
CNX IT (EQUAL)	-1.44%	NI15 (CAP)	-0.77%
NV20 (EQUAL)	-1.46%	CNX COMMODITIES (CAP)	-0.82%
CNX SERVICE (EQUAL)	-2.45%	CPSE INDEX (CAP)	-1.10%
CNX BANK (EQUAL)	-3.36%	CNX PSE (CAP)	-1.17%
CNX INFRA (EQUAL)	-3.80%	CNX AUTO (CAP)	-1.40%
CNX ENERGY (EQUAL)	-4.42%	NSE QUALITY 30 (CAP)	-1.48%
CNX COMMODITIES (EQUAL)	-4.94%	CNX IT (CAP)	-3.93%
LIX 15 (EQUAL)	-9.36%	CNX PSU BANK (CAP)	-5.67%
CNX PSU BANK (EQUAL)	-10.36%	LIX 15 (CAP)	-8.07%
CNX REALTY (EQUAL)	-12.10%	CNX METAL (CAP)	-12.71%
CNX METAL (EQUAL)	-12.32%	LIX15 Midcap (CAP)	-14.15%
LIX15 Midcap (EQUAL)	-14.25%	CNX REALTY (CAP)	-14.91%

Trend Model Summary

Index	Signal	% From Peak	Day of Peak
CNX AUTO	SHORT	9.51	2015-Jan-27
CNX BANK	LONG	8.93	2015-Jan-27
CNX COMMODITIES	SHORT	28.96	2008-Jan-04
CNX CONSUMPTION	LONG	2.44	2015-Apr-13
CNX ENERGY	SHORT	27.21	2008-Jan-14
CNX FMCG	SHORT	10.80	2015-Feb-25
CNX INFRA	LONG	46.72	2008-Jan-09
CNX IT	SHORT	88.69	2000-Feb-21
CNX MEDIA	LONG	24.79	2008-Jan-04
CNX METAL	LONG	60.32	2008-Jan-04
CNX MNC	LONG	3.13	2015-Mar-12
CNX NIFTY	LONG	7.07	2015-Mar-03
CNX PHARMA	LONG	9.35	2015-Apr-08
CNX PSE	LONG	25.36	2008-Jan-04
CNX PSU BANK	LONG	37.25	2010-Nov-05
CNX REALTY	SHORT	90.44	2008-Jan-14
CNX SERVICE	LONG	8.97	2015-Mar-03

Finance and FMCG showed an uptick in momentum. However, the word of the week is “listless.” Expect most trend followers to lose discipline right about now…

Categories Your Money Tags index, momentum, weekly