Loading ...The slow blade penetrates the shield… – Gurney Halleck Dune
Way back in January, I blogged about a system that I have come to call the Agosto Index*.
To recap those that don’t want to go back in time, it is a system that trades off the inverse relationship between the US Dollar and the Dow Jones Index using the proxies of UUP and DOG.
The Rules
When the UUP closes above the 10, 30, and 100 Day moving averages then buy 100 shares of DOG.
When the UUP closes below the 100 Day moving average then sell 100 shares of DOG.
It’s that simple. If you don’t have any shares then you wait for UUP to cross the threshold for a buy signal. If you are holding those shares, then you wait for the drop. I suppose you could get all fancy with it and try to continually use shorts or something to increase the Sharpe ratio but, in all fairness – this is one of those “Defend your 401k” kind of systems. Mostly all you have to do is pay attention to where UUP is during the last 30 minutes of the day and have a system that can execute a market order.
Market Order – Yeah I meant Market Order.
Specifically this system started doing very well in June of last year and ending with this trade. I expect it to do well as long as there is an inverse relationship between the US Peso and the stock market.
The Results so Far
| Date | UUP Adj Close | 10 Day | 30 Day | 100 Day | Trigger | DOG Close | Purchase/Sale |
| 10/06/08 | 22.92 | 22.72 | 22.69 | 22.89 | buy | 56.04 | -$5,604.00 |
| 20/06/08 | 22.69 | 22.84 | 22.71 | 22.83 | sell | 58.05 | $5,805.00 |
| 25/07/08 | 22.6 | 22.44 | 22.57 | 22.6 | buy | 60.52 | -$6,052.00 |
| 15/12/08 | 24.85 | 26.07 | 26.41 | 24.98 | sell | 70.43 | $7,043.00 |
| 05/01/09 | 25.19 | 24.75 | 25.55 | 25.18 | buy | 67.12 | -$6,712.00 |
| 08/01/09 | 24.74 | 24.82 | 25.37 | 25.22 | sell | 68.68 | $6,868.00 |
| 13/01/09 | 25.53 | 25.02 | 25.27 | 25.26 | buy | 71.1 | -$7,110.00 |
| 18/03/09 | 25.35 | 26.3 | 26.22 | 25.96 | sell | 77.59 | $7,759.00 |
| Seed | Profit/Loss | Percentage | |||||
| $6,000.00 | $1,997.00 | 33.28% |
However, obviously this won’t bode well for the Chinese who are holding quite a lot of US dollars that are suddenly going to be worth a whole lot less than what they were when they were stored in warehouses. Not only am I talking about the US Treasury debt that the American Mainstream Press keeps misreporting but, also the US dollars that were bought by the Chinese government and converted into Chinese bonds (probably backed by T-Bills) from the exporters in a very proactive attempt to slow down the massive explosion of inflation that it would have otherwise caused.
The Blessed Point, Cuervo
Look, there is no sense in crying Oh, the Humanity over this mess. It isn’t going to change anything and should the rally hold to 9k on the DOW there may be some folks out there (I’m thinking Fly’s neighbor Steve) that will breathe a little bit easier next time they open a report for their retirement fund (401k or RRSP for those living Up North).
Do I think this system will continue working? I’m not sure – there is a strong chance that the pressures that drove the USD into the inverse relationship will now change and while I am a firm believer that mechanical systems should not use stop-loss mechanisms this seems to me to be what Dr. Ernest Chan calls a “regime change”.
On the Other Hand
According to the experts, mean-reversion is getting stronger.
In Closing
This strategy since Jan 1 is up 12.01%** and since inception 33.28% but, it’s only a strategy. It’s something that works for now, was offered up for review and commentary (thanks RipeTrade) and was free.
If I am a fan of open source software – why should I not also open source my ideas? After all, any quantifiable edge has got a pretty short lifespan. However, if you read Dr. Chan you’ll realise that it’s probably longer than you might think it is.
With the probable coming growth in the commodity sphere I’ll be reviewing the first six months of last year with some Genetic Algorithms and (as usual) posting initial findings on my twitter feed http://www.twitter.com/cuervoslaugh and aggregating them for the PeeG.
Theme Song
* Agosto == “August” in Spanish (as in “Dog Days of August”)
** Returns would be different if one was continually riding the UUP/DOG rates and not limited to trading at the close.
+5 for the Gurney Halleck reference!
I always love reading your stuff. Enjoyed you big time when you were KoPG a couple of months back. What’s your take on the Fed buy plan of US Debt?
+5
@ZMoose12 – I think it’s an attempt at being innovative. But, it’s also one of the most telegraphed moves out there. Anyone who got caught shorting the banks yesterday sort of deserved what they received because that’s becoming a very crowded trade.
I don’t think we’re going to see any real results from this yet, they last week’s worth of climbs into positive territory need to be dealt with.
At the risk of being called a robotic spreadsheet – I do think this has a strong potential to be a huge plus for the market over the next 3-6 months. BUT, if the USD enters into a positive correlation with the DOW then all, and I do mean ALL bets are off.
*Update – this system is, as it’s currently configured, broken.
The reason? The correlation has swung wildly off. Case in point is that the previous week the UUP to DOW correlation was -0.91.
Through the first four days of this week (after Ben turned on the printing presses) it’s now down to -.64
After reconsideration and some Monte Carlo(ing) this system is still functional though at less than optimal results as long as the negative correlation is less than -.70
this is why correlation trading is low on my list. Correlations don’t last.