From the Hedge Fund Association, a white paper entitled: "Creating Alpha with Market Neutral Strategies" " Market neutral investing is perhaps the purest form of alpha as, by definition, it removes exposure to market direction and produces alpha through security selection. It usually involves the simultaneous purchase of an undervalued security and short sale of an overvalued security. Thus, the return depends on the spread between the long and short positions. A bond market neutral strategy would hedge out interest rate risk, to ensure that gains from the long position, due to upward movements in bond prices, would be roughly offset by losses from the short position. Unlike traditional investing, which concentrates on absolute returns, or returns relative to a benchmark, market neutral returns depend on the spread or relative value between the securities bought and sold regardless of movements in market direction. An equity market neutral portfolio is constructed similarly, but this time exposure to beta, the sensitivity of the portfolioâs movement to the general market, is hedged. A true market neutral fund will have to balance the beta on the long and the short side to hedge out stock market risk effectively. A market neutral approach can be applied to various asset classes, such as equities, government bonds or mortgage-backed securities and forms the basis for several investment strategies: convertible arbitrage and risk/merger arbitrage. "
how about a concrete example? pick a stock and we will watch stock/XLE spread for 1 month. p.s. Bone, by my estimate you own me >$200 for turning my thread into your Ad campaign
Shortie, I like your enthusiasm. I'm not going to completely break down a trade for you - my clients would be furious. I'll point you toward a path to enlightenment: SLB and APA both have greater than a 98% positive correlation to XLE.
Last time crude got to $145ish, a couple DOE reports came out and showed that demand fell like a meteor from the heavens. The Summer driving season was non-existent and refineries were actually turning away supply and they almost stopped cracking gasoline. Several months later, we were trading at $35. Demand is not a constant, and I am sure that the producers were selling HEAVILY into the last rally which was purely a speculative financial bubble. The lesson was that Americans will stop driving with $4 gasoline.
No "if true" about it. Which one holds a trend better ? Which one keeps you in the trade longer without getting shaken out ? Which one is easier to read ? Which one is cheaper to capitalize and leverage ? Which one is more consistent, month in and month out ?
as i mentioned in my opening post, the RSI divergence is still in place. there are maybe other signs of a possible top as well, not sure...