The Gundlach Reversion/Hedge

By: Erik Swarts | Fri, Nov 16, 2012
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Jeffrey Gundlach

Earlier this year, Jeffrey Gundlach presented a number of interesting contrarian pairs trades at the Ira Sohn conference. Six months out, they have done extremely well. Basically, they were mean reversion ideas on historic extremes. Short Apple - long natural gas. Long Spain - short the S&P. After this week, the short Apple / long natural gas wager (actually introduced at the end of April) is up almost 100%. The long Spain / short the S&P is up ~ 17%. Below is the latter Gundlach trade featuring Spain and the S&P.

 

The Gundlach EWP:SPY Chart

With that said, those looking for a little protection in dipping their toes on the long side of US equities here, may want to consider hedging themselves initially with a short position in Spain. Why?

Top Spotting 2007 SPX 2012 NDX
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As I have pointed out over the past two years, silver has led turns lower in the euro and Spain. However, over the past week the gold miners have collapsed rather precipitously - in a manner similar to their leading moves of Spain's equity market and the euro this year.

GDX EWP Chart
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Should the US equity markets continue to slide - or worst; the US dollar is likely to strengthen quite considerably. In this event, I would expect Spain and Europe to lead once again on the downside. Below is a modified version of the Gundlach trade - which I suspect reverts, that substitutes the NDX for the SPX. Interestingly, it crosses flourishes of both pairs trades.

The Modified Alpha Gundlach EWP:NDX Chart
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You can find me on Twitter @MktAnthropology.

 


 

Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

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