Tuesday, 15 July 2008

Bank Index Flirts With Stop Level

Woah, what a mess. Financial stocks are caving again in this morning. On top of yesterday's disaster, today's selloff put the BKX U.S. Bank Index briefly below its stop level for my trading setup this morning. That level is set at the past largest drawdown that the setup has seen since 1995 - or 14 percent. Based on the $54.60 entry price at Monday's open on July 14, that would mean the stop price is $46.95. However, I traded this signal with the 200-percent leveraged UYG ProShares Ultra Financials Fund, which has yet to fall below the stop level and hasn't fallen proportionally as much as BKX because of the vagaries of leveraged ETFs. The UYG entry price was $18.26 and, since it's a leveraged play, I adjust my position size so that my stop is 28 percent below the entry price (two times 14 percent). So that gives me a stop price of $13.14. The price right now is holding well above that level. The last few BKX trades have mostly gone in my favour and done really well, but alas you can't win every time. Welcome to trading. I'll be watching these levels closely in coming days.


Anonymous said...

Hi Alex,

It's just brutal :( the market did a intra-day bounce when the ^VIX was above 30, but started the slow spiral down again :( Is this it for equities?

Also, I'm curious about your take on the Natural Gas downward spiral and today's way out there Jan09-120 calls. Is this pure manipulation or someone really smart?


Alex Roslin said...

Hi Pete,

Yeah, the natural gas performance since my long signal sucks too. That market is probably the most volatile of any of the ones I've studied. You can clearly see how easy it's been for the hedgies to get wiped out, especially when they're all levered up as usual.

Note that the largest past drawdown for the natgas setup is 47 percent from the entry price, hence my smallish portfolio allocation of six percent. I kind of don't mind the current loss too much because of how nicely that setup did in the first half of the year.

But rest assured I am reviewing the data with an eye on finding a combination setup that has a lesser past drawdown. It's a great market also because it's not highly correlated with any other, so it offers a good diversification opportunity.