Happy New Year and Happy Trading in 2011

I started two portfolios in this blog with one focuses on a 2 times leverage of SSO and SDS and the other focuses on the bond pairs trading. These ETF bonds are  TLT vs PST (2x inverse) and TBT (2x inverse) vs IEF. The reason that I choose reverse is that it can be traded in a retirement account where short trade is prohibited in this type of accounts.


The pairs trading will be traded with a long and short pair in the interest rate ETF bonds. I only chose the TLT (iShares Barclays 20 year treasury)  vs PST (ProShares Ultra Short Lehman 7 - 10 year bond) and the TBT (ProShares Ultra Short Lehman 20 Year treasury) vs IEF (iShares Lehman 7 - 10 year treasury). The reason I chose the inverse ETF instead of short is that it can be traded in a non-margin retirement account and not paying dividend on the shorts. The pair will be traded in a non-correlated fashion comparing with the equity markets but the pair itself is highly correlated. This is to be less risky because of the nature of the correlated long and short pair in theory will go from convergence to divergence, and to convergence again from time to time as it is referred to "reverse-to-mean". The profits will be made when the pair reverses to its normal spread. For detail information on pair trading, reader can google pair trading and there are tremendous info related to pair trading or pairs trading on the internet.

As of 12/31/2010, all portfolios are fully invested based on my observation that the overall market will continue to trend up in a near term. The NYSE Advance and Decline issues indicated that this is the case at the moment. See chart below, as long as the $NYAD index stays above the 20 and 50 EMAs, the portfolios will remain the current positions.

Below is the chart on NYSE Advance and Decline Issues which indicated that the upward momentum is still strong.