DIA/SPY Pair Trade

Discussion in 'Trading' started by BDGBDG, Oct 27, 2006.



    Becuase of the way the dow is weighted and reconfigured, is there a high probability that, over the long run, it will always out perfrom the S&P500. It almost seems as though the dow is manipulated in a manner that virtually guarentees it will make new highs every half decade or so.
  2. Look back over a long time period and draw your own conclusions. But this seems to be the year of the large cap so the Dow has performed well.

    On a short term basis, it's a risky pairs trade. Earnings news (+ or -) on a single Dow stock can have an overall impact on the Dow that conflicts with the overall market direction.
  3. This is not a "pair"...
    And this is not an example of "pairs trading".

    It is a directional bet on medium caps and tech stocks versus large caps...
    But, really, a pure gamble... due to the efficiency and randomness of market sector and indices.


    How is it not a pair trade and how is it a gample on tech stocks. Please explain.
  5. To oversimplify... a good "pair" of securities:

    (1) Have an expected, rational, long-term close relationship... with correlation > 0.900

    (2) Are usually of the same class of securities.

    (3) Are illiquid or exotic enough... that one can exploit short to medium term market inefficiencies.

    SPY/DIA fails #1 and #3.

    There is no long-term "correct" or "fair value" relationship between these 2 indices...
    Because there is no "fair value" ratio between large caps, meduim caps, and tech stocks.

    As for #3... you will not find mispricing in super liquid stocks or indices.
    Do yourself a favor... and look elsewhere.


    That is YOUR definition or a definition you lifted. A pair trade is simply betting that one security will outperform another security. If I believe, which I do, that the dow will outperfrom the S&P 500 and if Iam worried about overall market direction, which I am, it is a trade that, at the very least, should be explored.

    Bet on technology- are you fucking kidding me?