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Ph.D Physics University of Michigan
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  • The best hedges
     View my blog at thequantinvestor.blogspot.com/

    If you've come to this post hoping for a lawn trimming pictorial then I'm sorry if I mislead you.


    Often when building a portfolio, investors look to 'hedge' their investments. Wikipedia defines a hedge (finance) as, '...a position established in one market in an attempt to offset exposure to price changes or fluctuations in some opposite position with the goal of minimizing one's exposure to unwanted risk.' The tools of quantitative analysis give us a powerful and simple way to quantify the effective of a hedge. The correlation between the price movements of two stocks tells us how similar the changes in price are. I've already covered the basics of correlations in a previous post, so I won't do it again here. The idea is though, that if we want the stocks to be ideal hedges of each other, we want their price movements to be anti-correlated (correlation coefficient = -1). In short,  if the price of one goes up one day the other should go down, and vise versa.


    So today I'll provide you with the top 3 quantitative hedges (Nasdaq only) of some of the most widely held equities in three sectors. Then I'll do something interesting and try to see if these hedges make sense, or if they're some kind of funny coincidence.

    _________________________________________________________________________

    First up are the 3 best hedges against Google (GOOG),

     

    Symbol               Correlation

    SCIL                    -0.8347                - Educational software

    ALXA                  -0.8158                - Pharmaceutical company

    SXCI                   -0.7897                - Pharmaceutical and healthcare IT

     

    _________________________________________________________________________

    Next up are the 3 best hedges against Qualcomm (QCOM),

     

    Symbol               Correlation

    THOR                   -0.8936                - Medical device electronics

    AMAG                -0.8336                 - Pharmaceutical company

    STRA                  -0.7967                 - Post secondary education services

     

    _________________________________________________________________________

     

    Finally are the 3 best hedges against Amgen (AMGN),

     

    Symbol               Correlation

    CRUS                   -0.4881               - Electronics

    WINA                  -0.4842                - Value retail

    VASC                  -0.4058                - Medical Devices

     

     

    So here's the thing...I see no rhyme or reason for any of these ideal hedges. Perhaps they are merely coincidental hedges or outliers of statistical randomness. Or perhaps they reflect some underlying trading activity. What I hope you get from this post is an understanding that a diversified portfolio can come from non-traditional combinations of equities. Perhaps Jim Cramer is a bit too presumptions in his, 'Are you diversified?' part of the show. Either way, once again, an (anti)correlation analysis is a powerful mathematic tool that you can add to your stock market toolkit.

    ----

     

    *There are more complicated ways to compute hedges and I will build on those in a later post. Namely, we don't simply want our portfolio to balance itself out and never profit, but we want to minimize fluctuation/risk while maximizing return (see: Sharpe Ratio). Stay tuned...

    Apr 05 8:12 AM | Link | Comment!
  • 10 MORE stocks showing unusual MONEY volume with no price movement...yet
    View my blog at http://thequantinvestor.blogspot.com/

    Last week I gave you ten stocks that were showing unusual volume activity but hadn't changed so much in price yet.

     

    http://thequantinvestor.blogspot.com/2011/03/10-stocks-showing-unusual-volume-with.html

     

    Well I though't I'd try and back up my post last week with some results a week later. Below is the one week performance of the stocks I said might rise.

     

                   close(3/23)  close(3/30)

    SNBC------3.30------------3.58------ + 8%

    PZZI  ------2.00------------2.05------ +3%

    OVRL------2.32------------2.18------ -6%

    PSMT------33.86------------36.57------ +8%

    HBHC------32.47------------33.00------ +2%

    HA     ------6.07------------5.99------ -1%

    GPOR------32.58------------35.41------ +9%

    EEI    ------20.16------------18.87------ -6%

    PLAB------8.08------------8.91------ + 9%

    WTSLA----3.55------------4.18------ + 18%

     

    As you can see, their performance was quite impressive, with an average gain of 4.4%! For comparison the Nasdaq gained just 1.3% over that same time.

     

    So this week I thought I'd do it again and give you ten more stocks showing unusual activity, with no price movement. This time, I'll try and improve on the measure a bit and make the assumption that increased volume isn't exactly what we're looking for, but increased money flowing into the stock is what we're looking for. Therefore I'll modify my metric from last week and change:

     

    volume --> volume*price


    or, in other words, how much money is exactly going into a stock. I believe this is a more accurate gauge of unusual activity because volume can be artificially inflated it the price falls, but a measure of pure money going into the stock accounts for this. Everything else remains the same, and for this week here is what the computer program picks up...

     

     Symbol     Money STDs above normal      Price STDs above normal 

    PANL               16.5906                                        0.706   

    MBND             13.7489                                        0.7927   

    ACHN              10.2386                                       0.6756   

    GFRE                8.7188                                        -0.002   

    MSHL               7.4808                                        0.3453   

    ACTG               7.4762                                       -0.4468  

    VRGY               7.0326                                       -0.0187   

    ISIG                   6.125                                          0.2311   

    MITSY              5.7848                                        0.2481   

    BSPM               5.7789                                         0.604

     

    As usual, no promises, and don't make any investment decisions purely on my calculations. Do your own research.

    Apr 01 8:40 AM | Link | Comment!
  • Highly profitable stocks for day trading
    Read my blog at

    http://thequantinvestor.blogspot.com/ 

    Day trading for retail investors is a completely different approach to the stock market than standard investing. For those who choose to venture into this risky but potentially lucrative area, the waters can be turbulent and tumultuous. From increased transaction costs, to quick decisions, and a 9am-4pm job, eyes locked in front of a computer, the task can be both exhilarating and exhausting. There are also things that make it easier than long-term investing, such as not needing to read fundamentals, not caring about balance sheets, and being able to take bad days off and completely remove exposure to the market. I would even argue that many of the high-frequency traders running Wall Street today are glorified day traders...though some might argue with that statement.

     

    In this post I will present to you some straightforward measures that can help you identify some potentially profitably stocks to day trade. I'll do this by proposing three different qualities day traders look for in a stock, and the simple equations you can use to calculate them. Finally I'll present the top 10 stocks that meet these qualifications. I myself am NOT a day trader, therefore I invite comments, criticisms, and feedback from those who do use these methods.

     

    1. High intra-day price variably as a percentage of price.

    This may be the most important quantification. Simply put, if the price doesn't swing significantly within each day, then you can't make money trading it. We can calculate intraday swing easily by taking the difference between the high and low prices of the day, then dividing it by the close.

     

    Price Range = (PriceHigh - PriceLow) / PriceClose.

     

    2. Total money that trades in the stock each day.

    If a stock doesn't have enough liquidity and volume to back it up, then it really doesn't make it easy to get in and out of it. This can make an intended intraday position carry overnight, cause one to sell at prices lower than intended, or not even let you purchase in the first place. The total amount of money that needs to be traded within a day is obviously dependent on the amount you have to buy. $100,000 in money volume may be enough if you only trade in the hundreds of dollars, but $10,000,000 or more in money volume may be necessary if you trade in the tens of thousands. We can calculate approximately by,

     

    Money Traded = PriceClose*Volume.

     

    3. Low Change/Range ratio 

    Finally what we want in a good day trading stock is price action that doesn't really move much overall, just fluctuates up and down. This allows one to trade in and out many times, or take long/short positions in a stock. We can quantify this by the ratio of the price change from day-to-day divided by the price range. The lower this ratio is, the more the price oscillates around a mean.

     

    Price Change / Price Range.


     

    Using these three requirements I have described for you, here are 10 stocks that oscillate over 4% on average, on a daily basis, over the past 10 days. They also trade over $1,000,000 a day and have very low price change/price range ratios.

     

    QUIK

    DBLE

    SCSS

    DTLK

    NVAX

    WRLD

    MERC

    SCOK

    TDSC

    AMSC

     

    As usual, I make no promises as to their performances, and I encourage you to do your own additional research and calculations before investing. But hey, if you can make 4% a day for each day this week, that's not to shabby...

    Tags: AMSC, DBLE, DTLK, MERC, NVAX, QUIK, SCOK, SCSS, DDD, WRLD
    Mar 28 8:52 AM | Link | Comment!
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