DD; I Finally found my holy grail I think
I was on this thread back in Jan, but drifted away mostly because it wasn't active enough. Since then I have done a lot of home work on the SPY, MDY and DIA . I hope The MDY is not off topic because the system
I think I like best uses it in conjunction with the SPY.
The DIA has been interesting to study, and somehow doing that lead me to form a Long Spy, Short MDY system. I was very interested in the
DIA as the Dow has so much psychological impact on the market.
While I'm sure the S&P has more intrinsic impact, and represents
the market better at most times, it all came together recently.
I'm aware that just looking at an index or doing TA on it is full
of pit falls, what we see is not always what we get. At least on
the short term. But I don't want to beat that horse right now.
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The Holy Grail of SPY , and MDY
quicken.excite.com
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Now look at the chart and ask yourself why the MDY over time don't
keep up with the spy, note the percentage spread in the 3yr time.
This is if you put the same amount of dollars in each one, in
Dec of 95..the SPY is up over 30% more than the MDY in the three
years, ( would project to 50% in 5 years )
Over the long term the MDY can't out perform the SPY, it's the
way they are made up. The spy gets new runners and there is no
limit to their cap size , the stocks in the MDY may run but at
some point they graduate, ( hence it losses it's best runners )
the shear mechanics of this for a long term player would be
to just go long the SPY and short the MDY.
IT's so fool proof and simple that it's being over looked by
the experts, or the ones who are using it are staying mum.
Now being the MDY is doomed to under perform the SPY over the
long term as it's best runners get cut out. Since 1995 short it
and long the SPY will give a spread of about 30% in 3 years.
With equal allocation the short side on MDY and long SPY should
cost very little actual cash outlay and be done on margin.
This is a lay up, as when the market moves down the MDY short makes more money than the SPY long loses . As a matter of fact if you don't leg in but go short MDY, then depending on my broker I should be able to use that money to go long the SPY.
While short term a trader will find at times
the MDY will out run the SPY, but if it does so very much; you can count on a market correction before long.
If my broker won't let me use the Money from shorting MDY
Maybe Buy Spy on margin ?
If I hold most of core money in a widow and orphan funds,
or several widow and orphan funds as a little diversity
here is wise. As I don't want just one of these core holdings
that give me the margin ability to by chance take such a dive
I have to make a margin call. But if I'm conservative there is
not much chance if any of that.
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The ideal lay up is x in widow and orphan funds,
x short the MDY ( gives x in my account ) then put that x long the SPY. 5% money market. The only time I should pay margin interest is when the MDY out runs the SPY..this does happen but I can go to sleep on it, the reality of it is I would hardly ever be on margin,
any down turns in the market are offset with the short on the MDY,
and I can leg out of the SPY if it looks really bad to the down side.
Keep in mind I want as base holding funds that pay a dividend
that exceeds margin rates, which have a long term track record that are not very volatal no matter what the market has done.
PPT PDF DNP are a few, FAX got hit last year but she is a
buy now, however you can see why I would spilt the x core holdings
at least 3 ways in the more solid and stable issues. As even Fax
took a 20% hit.
quote.yahoo.com
Don't let the chart fool you, had you run a DRIP on these
the interest would have compounded the gains nicely,
and the chart would show them much higher than what you see.
Then with a hedge x long spy x short MDY, At no real cost to me
, in 5 years I would expect to picked up 50K profit on a 100K
hedge.
Plus the gains in the funds, plus the dividends..and have a good
hedge all along. And could go to sleep and not worry
about jumping in or out or some sort of sneaky melt down.
The MDY will always lose the most on strong down turns, and there
lies the beauty of it.
It will only in squirts gain on the SPY, so the SPY over all is
offsetting any loses on the MDY short..all I want is the spread.
And I want that for damm near free.
I just wish I had seen it 5 years ago.
It's a lay up if there ever was one, and can give even a moron
plenty of time to leg out of any long side in a down swing.
As long as the core holdings ( widow and orphan funds ) hold price with out a 5% dip ; or a dip below their yearly yield as a grope , then I forget the knee jerks and rest easy. If one is not too greedy it's hard to beat.
If I reinvested profits each year this should
easily beat the S&P 500, while holding a hedge all the time.
With the lay up, you stick the dividends back into the core holdings and as they grow via DRIP so you keep them moving better than the
chart shows, also as they grow , then grow the size of the hedge.
If your nimble, leg out of the long SPY on down turns, and leg out of the short MDY on strong rallies. If your not nimble just
let them both run, and don't move if the core don't fall 5% or more.
Believe me if that happens the MDY short will have gained much
more and offset the loss in both the SPY and the core.
Actually the MDY is not 5 years old, so some of this is
hypothetical, but this system if used just the last 3 years beat the S&P hands down.
The trick here is being sure I have a broker that lets me buy
The Spy with the MDY money early on. And calculates margin
only by the difference between what is lost on the short from
gain on the Long.
With equal dollars on each side of the long , short..
the percentages are figured, like if the MDY goes up 25% I lose
25 of x, but at the same time, SPY will likely go up 35% so I gain
that for a 10% net gain of x. On the other hand if MDY goes up 25%
and SPY only moves 15% I'm at a loss of 10% x , and that 10%
should be what I pay margin on.
I have not talked with my broker yet on this, and to me it sounds
almost to good to be true and workable. But I sure intend to dig
into it, as I have no fear what so ever that over time, the long
SPY will out do the short MDY. To me the Long Spy meets at least
half the margin of the short mdy, and the core holdings should
meet the other half, and the Margin I pay interest on should not
exist unless the MDY out runs the SPY after I open both positions,
and I don't think my timing is so bad as to open them when the
MDY is doing it's thing.
In a way a good entry makes the spread between them a free ride, and the core holdings is there to reassure the broker.
I have to check this out one more step, if it's workable I'll
likely shut up about it and be sorry I ever posted it.
But there has to be something wrong with it, it's just to easy.
End of holy grail.
Jim |
