Several readers noted the high correlation of TLT and SHY (long and short term bonds) in the PDQ Dashboard yesterday. While a first glance at such a high linearity might suggest that there was little advantage to using SHY momentum to forecast TLT, the resultant PDQ calculation demonstrates that is not necessarily the case. Of particular interest in the extremely short “Day”s value of 3 . . the typical length of a trade excursion. Note that SPY and XLE produce similar “Days” values, which suggests that the best use of this PDQ pair setup is for 3 to 4 day trades, with the former being the safer time-frame.
Several readers also thought that the TLT PDQ signal was out of sync with the market but in defense of the PDQ I must note that the date of the PDQ was the 12/27 close (our Short entry) . The following day (the 28th) TLT dropped 2.3 % and our trailing stop then exiting the trade on the 29th after it retraced .05%, netting 1.8% for the trade. To wet your appetite a little bit . .above is the new Project Zero run of the TLT/SHY pair, showing about a 5% improvement over the Project Z results. As the new year commences we’ll detail the thinking behind Project Zero, which is designed to capture the lowest risk sweet spot of the of the Z score excursion.
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