Wednesday, November 16, 2011

Which markets to follow

I think I am trying to follow too many markets and cannot focus on anything in particular. This behavior may derive from the "fear of missing out", which I suppose is what you feel when you are practically 100% cash. There has to be a right range of markets that the human mind can follow without getting lost in the data. I notice that often when I am looking at tons of charts, one after the other, I lose focus, then I realize I should have been looking at some other indicator, instead of the one I am actually looking at, then some other thought comes up, like for example I could use a certain tool to compare this and that, and I'm lost.

I have been trying to find a few markets with no correlation between them, but I always end up looking at commodities and they are far too volatile for my taste at this time.

I have tried with a shortish list of US market sector ETFs, and I can see the difference in volatility among them, and that some have a more of a tendency to follow the equity market trend, but they all still pretty much move in unison with the S&P 500.

I have tried looking at all 30 of the stocks in the DJIA, and they are too many. I would have to reduce this list to only 10 maybe.  I haven't done so yet because of the "fear of missing out", but I am starting to think that it's the best thing to do.
Maybe a good approach is to have circles of attention.  One smaller circle with just a few securities, possibly all different and with as little correlation between them as possible. One larger circle with more securities, to be looked at every once in a while.

So, I made a list of a semi-random sample of ETFs and some large cap equity stocks, their price, their standard deviation for the last 21 days, and the ratio of standard deviation to price, sorted by percentage standard deviation, in descending order.  The idea is to pick a currency, a commodity, a bond fund, a stock index and an equity stock, and those would be the markets in the smaller circle. I am using percentage standard deviation as a proxy for volatility, because I am interested in choosing instruments with low volatility, to reduce risk.


TICKER PRICE STDEV(21)
IEI 121.58 0.53 0.4%
IEF 104.21 0.9 0.9%
FXC 97.84 0.87 0.9%
KO 67.95 0.65 1.0%
uup 21.85 0.21 1.0%
xlp 31.19 0.3 1.0%
T 29.07 0.3 1.0%
fxe 135.75 1.5 1.1%
splv 25.06 0.32 1.3%
xlu 34.99 0.45 1.3%
bab 28.53 0.37 1.3%
corn 41.64 0.57 1.4%
dbc 27.93 0.4 1.4%
xlk 25.96 0.38 1.5%
hyg 87.32 1.29 1.5%
MSFT 26.68 0.41 1.5%
PG 62.98 0.98 1.6%
fxf 108.93 1.71 1.6%
fxa 102.01 1.62 1.6%
GOOG 613.86 10.26 1.7%
ewm 13.48 0.23 1.7%
spy 125.25 2.3 1.8%
MCD 93.99 1.76 1.9%
tlt 116.97 2.22 1.9%
INTC 24.5 0.52 2.1%
bal 59.87 1.35 2.3%
AAPL 379.35 9.87 2.6%
jo 59.16 1.62 2.7%
ews 11.82 0.33 2.8%
pin 18.79 0.54 2.9%
ijr 66.87 1.93 2.9%
ewl 22.37 0.65 2.9%
CSCO 18.9 0.56 3.0%
ung 7.94 0.25 3.1%
sgg 86.97 3.02 3.5%
uso 37.98 1.49 3.9%
amzn 219 11.77 5.4%

The ones I should be looking at are in bold.  I have excluded a few at the top because of personal preference.  It's interesting to see that some of my favorite ones are pretty low in this list, and probably I should stay away from them, with the exception of UNG, maybe.  That's because UNG seems to be in a downtrend, while pretty much everything else is in a trading range. Am I already breaking my own rules? Probably.

Anyway, that's the general idea now, to follow IEF, KO, UUP, XLP, and CORN.
KO is generally positively correlated with XLP and the equity market at large, and with CORN, and inversely correlated with UUP, but some of these relationships are not constant and can reverse for weeks at a time. However, KO represents about 7% of XLP, since Coca-Cola is a consumer staple, so the correlation between them is unlikely to reverse entirely for long stretches of time.

So, these are my markets now, and although I expect the list to change over time, I should really make an effort to keep the number at five, to be able to really focus and learn.










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