Following up on yesterday’s XLF / TBT pair trade, here’s a few more trade descriptors to help understand the setup. First of all its important to understand that this is a correlated pair, since TBT is the 2x inverse of TLT, which typically trades contrary to the S&P, while XLF trades in sync with the S&P. This correlated relationship is evident in Para A while Para B (the Rolling Log Ratio) clearly demonstrates there is an identifiable cycle when this correlation moves out of sync…these are our trade opportunities.
To further clarify how the Pairs Analysis algorithm captures the “sweet spot” of this cycle we can turn on the trade topography mapping feature (below) which illustrates the gradual development of the cycle until it culminates in a flattened mode at day 22. This target excursion of 22 days for a trade cycle is also why we use an “N” day stop (22+1)…if the trade has not maximized by this time, the odds of diminished returns( risk) increase for every additional day we hold the trade. There are other creative ways to utilize the trade mapping tools to enhance forecasting odds but we’ll leave that discussion for another day. Suffice to say that Market Rewind users who haven’t accessed the robust mapping tools of the Pairs Analysis Model are really handicapping their trading, IMHO.
