ASX Stock Pairs Trade Journal

[skc]

DJS's new PAT is down 0.5% to 2%, vs -5% reaffirmed by MYR, DJS also did so from a better earning figure last year (positive growth) against MYR (negative). These numbers are still telling me that DJS is a better business over MYR and deserves its price premium.

The long term average price ratio is 1.39 (since MYR listing, 1.4 on day 1), so some long term cointegration may be happening (not tested). Anyway, I only took half position size than normal to test my read of the two stocks, and hopefully I can see a good outcome.

Watching FXJ yesterday around 11 am was fun (and rewarding), the plunge from .905 to .855 all happened in less than 1 minute (institution sell off, then possibly followed by stop loss triggers at .9 and below, or the institution was just keen to dump more of FXJ), then a V shape rebound soon after.

Another stock that seems out of whack in the last few days is TOL, not quite sure what's happening with that, so it looks like there is a good trading opportunity.

Basically the whole market is bearish on domestic economy stocks. TOL is considered a barometer of the domestic economy, much like FedEx in the US. Having said that TOL is fast approaching its GFC low and they didn't even do a cap raising during that time. I think TOL is a fundamentally cheap share and can be paired with say the XJO for a trade.

With DJS / MYR: DJS has enjoyed an aura for a while as being a well-managed, resilent company, and has a higher PE than retail peers to boost. That's why the common headline for yesterday was SHOCK downgrade. That NPAT change % is the full year, but their forecast for H1 12 is much worse, although MYR didn't even provide a forecast. Anyway, fundamentally I wouldn't say DJS deserves a higher multiple than MYR, but it doesn't mean there isn't a profitable trade to be had.

Also I think fundamentally HVN and JBH are more screwed if you want to look at the thread of online shopping. It's pretty hard to buy dresses online but I can't remember the last time I bought any electronics without getting a better deal on ebay etc.

I actually opened a long MYR short BBG today. BBG's chart will plunge on a break below $6, whether MYR should not plunge too much after yesterday... Let's see if that is the correct read.

 

[SilverRanger]

Basically the whole market is bearish on domestic economy stocks. TOL is considered a barometer of the domestic economy, much like FedEx in the US. Having said that TOL is fast approaching its GFC low and they didn't even do a cap raising during that time. I think TOL is a fundamentally cheap share and can be paired with say the XJO for a trade.

With DJS / MYR: DJS has enjoyed an aura for a while as being a well-managed, resilent company, and has a higher PE than retail peers to boost. That's why the common headline for yesterday was SHOCK downgrade. That NPAT change % is the full year, but their forecast for H1 12 is much worse, although MYR didn't even provide a forecast. Anyway, fundamentally I wouldn't say DJS deserves a higher multiple than MYR, but it doesn't mean there isn't a profitable trade to be had.

Also I think fundamentally HVN and JBH are more screwed if you want to look at the thread of online shopping. It's pretty hard to buy dresses online but I can't remember the last time I bought any electronics without getting a better deal on ebay etc.

I actually opened a long MYR short BBG today. BBG's chart will plunge on a break below $6, whether MYR should not plunge too much after yesterday... Let's see if that is the correct read.

Yes HVN and JBH (especially HVN) are definitely the screwed ones in retail. That's why I generally have no hestitation in shorting them when they overshoot. Personally I have never shopped in both stores!!

Retailers like BBG and KMD seemed less affected by the DJS downgrade, which I think makes sense as they are more diversified than the domestic retailers. But after the plunge I too would not see MYR going south relative to its peers (til they give profit guidance for 2012 perhaps ), so this could be good.

I ended up pairing TOL with LEI, just out of convinience and good past record (and amazingly high correlation), could do it with XJO too, but ideally I like XNJ (which can't be traded) or CEU (might need to queue for it)

 

[skc]

Yes HVN and JBH (especially HVN) are definitely the screwed ones in retail. That's why I generally have no hestitation in shorting them when they overshoot. Personally I have never shopped in both stores!!

Retailers like BBG and KMD seemed less affected by the DJS downgrade, which I think makes sense as they are more diversified than the domestic retailers. But after the plunge I too would not see MYR going south relative to its peers (til they give profit guidance for 2012 perhaps ), so this could be good.

I ended up pairing TOL with LEI, just out of convinience and good past record (and amazingly high correlation), could do it with XJO too, but ideally I like XNJ (which can't be traded) or CEU (might need to queue for it)

LEI is not a bad one and it is as good a proxy for the domestic economy as TOL is. CEU just beware that it is supposedly the takeover target for TCL... well it has been for the last 3 years anyway...

 

[SilverRanger]

LEI is not a bad one and it is as good a proxy for the domestic economy as TOL is. CEU just beware that it is supposedly the takeover target for TCL... well it has been for the last 3 years anyway...

Interesting mention of TOL and LEI on BusinessSpectator today, both going in my favour

Toll Holdings
Toll Holdings is another stock that has come under fire of late, with the logistics firm’s shares lagging its peers by about 20 per cent in the last nine months or so. Toll is also looking to replace outgoing head honcho Paul Little with an internal candidate, most likely current CFO Paul Kruger, after a lengthy search process, and amid the negativity UBS analysts reckon the company could be a good target for private equity suitors. According to UBS, a new owner could bring some fresh blood into the company, divest the Singapore logistics arm for a hefty price tag and focus more on the mining services side of the business, rather than the ailing retail services. The analysts add that Toll could fetch a price tag of around $5.5 billion.

Leighton Holdings
Leighton Holdings may be in for some more pain with Goldman Sachs analysts saying that the construction firm could be facing the prospect of further profit downgrades, up to the tune of $200 million, despite positive signals at its Airport Link project and its Habtoor Leighton Group venture. The main source of the speculation is the Victorian Desalination project, which is already behind schedule and, according to analysts, expected to be further weight on Leighton’s overall numbers.

 

[skc]

Interesting mention of TOL and LEI on BusinessSpectator today, both going in my favour

Toll Holdings
Toll Holdings is another stock that has come under fire of late, with the logistics firm’s shares lagging its peers by about 20 per cent in the last nine months or so. Toll is also looking to replace outgoing head honcho Paul Little with an internal candidate, most likely current CFO Paul Kruger, after a lengthy search process, and amid the negativity UBS analysts reckon the company could be a good target for private equity suitors. According to UBS, a new owner could bring some fresh blood into the company, divest the Singapore logistics arm for a hefty price tag and focus more on the mining services side of the business, rather than the ailing retail services. The analysts add that Toll could fetch a price tag of around $5.5 billion.

Leighton Holdings
Leighton Holdings may be in for some more pain with Goldman Sachs analysts saying that the construction firm could be facing the prospect of further profit downgrades, up to the tune of $200 million, despite positive signals at its Airport Link project and its Habtoor Leighton Group venture. The main source of the speculation is the Victorian Desalination project, which is already behind schedule and, according to analysts, expected to be further weight on Leighton’s overall numbers.

I was going to open a TOL position until I read this. I get scared when a broker so kindly volenteer something as a takeover target... probably just means they want some fees from possible corporate action, or worse they want to sell a whole pile of shares...

The LEI rumour probably has some truth in it imo. I will let you know next time I drive to the airport here in Brisbane

 

[SilverRanger]

New trade today: WPL/OSH, WPL has been under pressure since the cost blowout/project delay announcemnet and perhaps BHP making moves in shale gas. Fundamentals aside, I'm expecting a short term rebound later in the week.

Halfway through to July and it is already my best performing month of all time!!

 

[skc]

New trade today: WPL/OSH, WPL has been under pressure since the cost blowout/project delay announcemnet and perhaps BHP making moves in shale gas. Fundamentals aside, I'm expecting a short term rebound later in the week.

I went with ORG/OSH... your trade doing better than mine today

Halfway through to July and it is already my best performing month of all time!!

Nice. I am only breakeven

 

[keroppi]

Hi guys,

I have been trading pairs for a long time with a friend. We started pairs trading before this thread was created.

I have been a longtime lurker on this thread, but thought I'd start to get involved with questions, comments, and trades.

Couple of questions to start off with:

We have found the year to date to be tough. We are only slightly above breakeven. How have you been doing this year?

Do you pairs trade as a full time job? My friend and I both hold full time jobs and sometimes find it difficult monitoring and trading pairs because of the amount of time involved.

Opened a position in AMP/QBE today.

 

[skc]

Hi guys,

I have been trading pairs for a long time with a friend. We started pairs trading before this thread was created.

I have been a longtime lurker on this thread, but thought I'd start to get involved with questions, comments, and trades.

Couple of questions to start off with:

We have found the year to date to be tough. We are only slightly above breakeven. How have you been doing this year?

Do you pairs trade as a full time job? My friend and I both hold full time jobs and sometimes find it difficult monitoring and trading pairs because of the amount of time involved.

Opened a position in AMP/QBE today.

For 2011, Jan / Feb were flat for me but Mar to May were great going with all that volatility. June was average but I took 2 weeks off then. I'd say 2011 has been a decent year to pairs trade so far.

I trade the market full time and pair trading takes up ~2/3 of my capital (can't tell what proportion of time though). I would find it difficult if I am not able to monitor my pairs on a full-time, continuous basis.

So do you use the Pair Trades Finder software or some other methods to generate your signals? How do you pairs trade with a friend?

 

[skc]

LEI is not a bad one and it is as good a proxy for the domestic economy as TOL is. CEU just beware that it is supposedly the takeover target for TCL... well it has been for the last 3 years anyway...

Not a moment too soon. CEU getting a bid at 55c.

http://www.smh.com.au/business/cp2-bids-for-connecteast-20110722-1hrkl.html

 

[keroppi]

So do you use the Pair Trades Finder software or some other methods to generate your signals? How do you pairs trade with a friend?

We use PTF software combined with other modelling methods. We enter a pair when one of us identify that a pair is on and we both agree to entering the trade. As for exiting, we exit when it breaches a criteria, however, both of us have the ability to exit any trade at any time.

Exited AMP/QBE for a small, quick profit yesterday.

 

[SilverRanger]

Not a moment too soon. CEU getting a bid at 55c.

http://www.smh.com.au/business/cp2-bids-for-connecteast-20110722-1hrkl.html

Nice call, sadly TOL didn't get much benefit, and even more sad is I was queuing to buy CEU at 43.5 cents just two days ago and missed out!!!

This morning missed out on APN/FXJ as I realised FXJ isn't shortable....

 

[skc]

We use PTF software combined with other modelling methods. We enter a pair when one of us identify that a pair is on and we both agree to entering the trade. As for exiting, we exit when it breaches a criteria, however, both of us have the ability to exit any trade at any time.

Exited AMP/QBE for a small, quick profit yesterday.

Sounds like a good system to keep each other from taking ill considered trades.

Nice call, sadly TOL didn't get much benefit, and even more sad is I was queuing to buy CEU at 43.5 cents just two days ago and missed out!!!

This morning missed out on APN/FXJ as I realised FXJ isn't shortable....

TOL doesn't run toll roads! I actually have MQA/TCL on at the moment but both are just moving in sync after the CEU news. Will probably exit half the short leg sooner than later just in case some Canadian teachers get cute on me.

TEN is shortable and I am queueing for a APN/TEN, although both shares are somewhat risky...

 

[SilverRanger]

Sounds like a good system to keep each other from taking ill considered trades.



TOL doesn't run toll roads! I actually have MQA/TCL on at the moment but both are just moving in sync after the CEU news. Will probably exit half the short leg sooner than later just in case some Canadian teachers get cute on me.

TEN is shortable and I am queueing for a APN/TEN, although both shares are somewhat risky...

For the last couple of days I kept thinking TOL is in fact TCL (Toll Holdings to run toll roads, that make sense), lucky that would have made no difference to my trade decision at the end, as I treat them as "industrials" broadly (and both considered as takeover targets)

New trades today: WDC/GMG, APN/TEN (thanks skc!!), probably won't take on any more pairs til I close off my existing ones.

Skc, do you have an upper limit on the number of pairs you open at a time?

 

[skc]

Skc, do you have an upper limit on the number of pairs you open at a time?

I don't have a hard limit but the maxium I've had is ~18 pairs. It does become quite unwieldy and often I end up killing the older pairs or taking quick small early profits to bring the total down. When I have 18 pairs it also start to push the initial margin required on my CFD account.

However having more pairs allow me to take smaller positions on each pair and reduce the risk of any individual trade.

 

[magin]

Hi.
i'm new in this site and in Pair trading. At this moment i read all this thread and are testing PTF. This thread is really amassing, congratulation all of yours for it. It help me a lot to understand some things.

I would like to know what configuration are using in this moment at PTF. I read that in same case use 14 days for Std deviation and 100 for correlation. I don't change the default configuration, so if you have a better one please let me know.

Pair trading is an excellent strategy, but what score have in the past years. I want to know to set up my expectations and allocate a portafolio to it.

A came from Uruguay so i am not an english speaker. Sorry for my mistakes.

Thanks very much for your helps.
Magín Martínez.

 

[skc]

Hi.
i'm new in this site and in Pair trading. At this moment i read all this thread and are testing PTF. This thread is really amassing, congratulation all of yours for it. It help me a lot to understand some things.

I would like to know what configuration are using in this moment at PTF. I read that in same case use 14 days for Std deviation and 100 for correlation. I don't change the default configuration, so if you have a better one please let me know.

Pair trading is an excellent strategy, but what score have in the past years. I want to know to set up my expectations and allocate a portafolio to it.

A came from Uruguay so i am not an english speaker. Sorry for my mistakes.

Thanks very much for your helps.
Magín Martínez.

Welcome, Magin. Which market are you trading? US, Australia or Uruguay?

I don't know what the default setting is but you need to understand what you want to achieve and set the parameters your way. In general, a shorter std dev will produce more signals. You might also want to adjust the layer setting to suit your shares and trading style.

 

[magin]

Welcome, Magin. Which market are you trading? US, Australia or Uruguay?

I don't know what the default setting is but you need to understand what you want to achieve and set the parameters your way. In general, a shorter std dev will produce more signals. You might also want to adjust the layer setting to suit your shares and trading style.

Thanks for your response.
US market I trading.

I have all set to 100 days, layer to 2.7 stddev and exit at 1.
I like to trade pairs not long time, ten days(or less) it will be excellent to me.

Any recommendation will be fine.

Good trades!
Magín.

 

[keroppi]

Magin, yes, I have found the best trades usually last a few days. Although, with those settings you have, some pairs may take longer to breach exit.

Entered a position in MND/UGL

By the way, do any of you trade FX? I know Jared does, but I am not fully sold on those trading robots.

 

[EasyTrader]

Traders

I have been a few trading pairs for about 12 months using my own methods and programs. While I am happy with my progress I am looking to expand into other suitable pairs to trade. Need to be ASX 200 type stocks, strong dividend yields in similar sectors. One example I use is CBA/WBC. Can you suggest some others for me.