The other day I was reading an article in Seeking Alpha by Erik Gholtoghian in which he established a multi-factor capm model between DRYS, SEA and USO which can be summarized as follows:
DRYS weekly % change = 1.38*weekly% change in SEA+.56*weekly %change in USO.
SEA is the Guggenheim/Delta Global Shipping ETF which was introduced in the middle of last year, OIH is the Merrill Lynch Oil Service Holders ETF. I decided to conduct a study that examined the correlation of SEA with respect to commodities that are shipped by DRYS container ships. In the first chart the correlation matrix includes data from the SEA ETF which started trading in June last year. The strongest relationship exists between XLE and IYM for 06/14/2010 till present and from jan 3 2007-present. There is also a strong correlation between SEA and IYM and XLE over the much shorter period. These represent potential trading opportunities assuming that pairs trade within certain ranges and they mean revert.
The first chart below summarizes the relationship between IYM and XLE from January 2007 till the present. Clearly there are buying opportunites when IYM trades below XLE and selling opportunties when IYM crosses above XLE. There are a few ways to play this one could go long IYM at some point after crossing XLE from above and waiting till it once more crosses XLE from below. A second trade is to buy XLE and Sell IYM when the spread between the two has widened and close out the position when it converges.
In the second chart below I incorporate the SEA data from 06/14/2010
till present.
Differencing by decomposing a regressional trend (de-trending) would find the freq of the trend and thus your ranging data.
ReplyDeleteTesting all data sets with autocorrelation, i.e. a lagging correlation through the n with its self and then comparing to the other sets may produce an interesting result, I'd has a guess DRY cyclical freq's are ahead of the others mentioned. Or you may find that the sets freq's maybe be inline or flagged ahead of a move. The goal would be to gain a heads up.
My money would be on DRY as a leading indicator and trading the trailing spaces identifyable in its cyclical freq.
Just an idea.