One of the most useful concepts when constructing trading strategies is the idea that key markets are related and interconnected. This concept is particularly applicable when creating strategies to trade stock index ETFs such as the SPDR S&P500 Index Trust (SPY).

The stock and bond relationship - Fundamental concept review

On one side, asset managers see stocks and bonds as their primary asset allocation options. Indeed, many investment programs (Pension funds, mutual funds, and structured ETFs) are based upon the idea that the investor should maintain a constant percent allocation to each of these asset classes.

For example: One of the most common asset allocation schemes is the, "60% stocks, 40% bonds" allocation. Some "lifecycle" funds attempt to provide a "one-stop choice" for retirement planning. They operate by gradually increasing the allocation to bonds as the "retirement date" approaches. Such funds might start at 80% stocks, 20% equities, and end

There are times when following a company closely pays off.

For example: Investors who acted on my first National Beverage (FIZZ) article were rewarded with a quick 20% gain, as we successfully anticipated last year's special dividend, which lead to a subsequent jump in price. After highlighting the outstanding value this company represents in this article, I am now prepared to make a major call on National Beverage:

I am setting a price target of $20 for National Beverage, which represents a 42% gain over the recent trading price. In fact, I believe that at its current price, National Beverage offers an almost unbeatable combination of upside potential and relative safety.

What is the market missing about National Beverage?

To fully understand the investment thesis, investors need to move beyond a narrow fixation on backward-looking valuation metrics in order to see the full investment picture (serious investors who

In recent years, VIX ETF, ETN, and Futures contracts have paradoxically been one of the greatest trading opportunities for individual investors, as well as one of the great money losers of all time. The reason for this paradox is simple: Unlike a stock, bond, or even a standard commodity futures contract, volatility products have no underlying cash flows that derive from the real economy. VIX trading products are entirely a financial product, and as such, they are zero-sum between individual market participants.

What has separated the winners from the losers? I believe it is simple. On one side of the trade have been those who bought into the notion of "buying volatility" or "hedging with volatility" or even "selling volatility because it is overpriced," yet have implemented these things with little understanding of how these markets work. On the other side have been those who analyzed underlying economics of these

Our article on "Turnaround Tuesday" documented that weekly seasonality has existed in S&P 500 prices, and that this seasonality (while never constant or fixed) can be a useful secondary tool for practical traders. In fact, this "turnaround Tuesday" pattern was just one example of how seasonal market tendencies can be incorporated into trading strategies.

One seasonal pattern that I have been keeping track of and trading for 10+ years is an annual pattern that has existed in long-term bond prices. I have tracked and traded this pattern using the 30 year Treasury bond futures contract, however it has also been valid for trading the Ishares 20+ year Treasury bond ETF (TLT).

My research indicates that the ideal time to short treasury bond futures (or trade with a short bias) has been mid to late January, and the ideal time to cover the short has

Upon selecting December 27th as the payment date for National Beverages' (FIZZ) $2.55 special dividend, CEO Nick Caporella stated:

"We, fortunate enough to be called Americans, must profoundly engage to 'lighten' her heart - 'ignite' her torch - and 'soothe' her soul, giving evil and stress . . . the final eviction notice! That should be our ultimate gift of choice this Christmas and forever - All of Us!"

To say that Caporella is a CEO with a uniquely inspiring viewpoint would be an understatement. Yet the charismatic prose for which Caporella has become known is subtle compared to the market leading returns that his company, National Beverage has quietly generated for investors over the past 20 years.

National Beverage is,

"...A leader in the development and sale of flavored beverage products in the United States, offering the widest selection of flavored soft drinks, juices, sparkling waters

This analysis builds upon the studies presented in the article, "You can profit from other investors' mistakes: Price action research in the SPY" to demonstrate how simple information can be used to create powerful trading edges. If you have not read the referenced article yet (or need to refresh your memory), I suggest you read it before diving into this one.

In the article mentioned above, we noted that the expected return for the S&P 500 ETF is higher after the market closes poorly (For example, if the market closes in the bottom 50% of the day's trading range). The entry signal was to enter on the close of the same trading day that the trading signal was generated.

In this article we will use the basic swing trading concept described above, but will look at entering the trade either next day on the open, or the next

One common notion among market timers is that a negatively sloping yield curve suggests a future recession and poor stock market performance. In this study, we will use the available evidence to examine this notion, and then convert our findings into two simple decision rules. We will then evaluate the performance of these two rules relative to using a "buy and hold" strategy.

First, what is the yield curve? The yield curve is simply a graphical relationship of the yields available at different maturities for the same class of debt security. The most common type of security to use when constructing yield curves is government Treasury securities.

Let's look at yield curve data as of 10/15/2012 (Source - U.S. Treasury Department):

(click to enlarge)

Yield curve data in graphical form:

(click to enlarge)

Just an interesting note before we continue: The lower line is the government's own estimate

In our last article, we discussed the concept of long term trend-following and how it might be applicable to the S&P 500 index and the SPDR S&P500 ETF (SPY). We then evaluated what is perhaps the most simple trend-following idea possible:

• Buy if the market closes this month above the close "X" months ago
• Sell if the market closes below the close of "X" months ago

Note that this signal is like a switch that is either on or off. If you currently have a position (due to a prior signal) you simply hold until you have an exit signal. If you have no position, then you stay in cash until the next buy signal.

In this article, we will advance the concept a bit further with a moderately more complex trading signal. Rather than looking at the close this month relative to the close "X" months ago,

In our previous article, (see here) we documented that over short periods of time stock index markets such as the S&P 500 ETF (SPY) have a tendency to experience price reversals: Market strength is on average followed by market weakness, and Market weakness is on average followed by market strength. We noted that this counter-intuitive behavior seems tailor-made to throw off the timing of the average investor.

But what about over longer periods of time? Look at a long term chart of the S&P 500 index or the Dow Jones Industrial Average, and it becomes clear that there have been large benefits to owning stocks over the very long term. However, this has also entailed suffering through long periods where stock prices fell and there was substantial downside volatility.

Is there any way to improve on buy-and-hold results? If history can be used as a guide, it appears that

Many traders approach the market with the belief that good trading ideas must be complicated. Traders dive right in with arcane theories, advanced mathematical approaches, or highly subjective approaches that only an eye with natural talent and 10,000 hours of screen time can identify (take your pick).

The NAS Trading perspective is that simplicity is often the best approach. Simplicity can work for a simple reason: The vast majority of investors have an inordinate tendency to do the wrong thing at the wrong time. These emotionally driven capital flows show up in the form of market patterns.

It is common to hear that most investors have bad timing. What is the evidence for this assertion? I believe it can be found in the difference between time-weighted and money-weighted returns. If you are unfamiliar with this concept, check out this article.

Where does all the money from investors' bad

At NAS Trading, we believe that VIX futures and the VIX ETN (VXX) currently present some of the best profit opportunities for individual traders.

What exactly are VIX futures? It is always best to go straight to the source. The CBOE education site states:

"The CBOE Volatility Index is based on real-time prices of options on the S&P 500 Index, listed on the Chicago Board Options Exchange (Symbol: SPX), and is designed to reflect investors' consensus view of future (30-day) expected stock market volatility... The contract multiplier for each VIX futures contract is $1000."

If you have ever looked at a chart of the VIX ETN note or VIX futures, it has likely occurred to you that this seems to be a great market to sell short. A cursory glance suggests that this market has a tendency to experience significant and prolonged downtrends that seem inevitable after each period

This is Part 2 of this article .

One of my favorite essays written by Warren Buffett and contained in the book "The Essays of Warren Buffett: Lessons For America" is his analysis of See's Candy found on pages 218-222 (second edition). This essay contains remarkable insight on how to profitably invest in an inflationary environment.

The general topic is accounting goodwill vs. economic goodwill, and asset light, high return on investment capital businesses vs. "hard asset" capital intensive (lower return on investment capital) businesses. To some this may sound deadly boring, however if you are interested in prospering in an inflationary environment, I strongly suggest that you continue reading.

Rather than regurgitate the contents of the essay and his specific examples (He uses See's candy vs. a hypothetical "capital intensive" business with the same level of total profit) I want to summarize the points that I think