A bear market will begin with days, according to Robert Morrow. Morrow, an engineer by training, has used “vibration analysis” to predict market moves. He has high marks from Timers Digest and has made some prescient calls in the past, including the 2007 crash.
We closed out the short trading position that we spoke about last week in CAT. CAT had declined about 4% since then on disappointing earnings.
Today we closed out the pairs trade we wrote about on July 3 (+CHY/-CHI). We entered the trade at a spread of 6.3% and exited today at a spread of 5.09%, the difference represents the profit. To profit on a trade like this, you need the spread to narrow, which is what happened here.
We are closing out our long positions in CAT at about $86. We had mentioned CAT as a good long term investment at about $87 on May 5 and we still believe that. But with the China slowdown the stock maybe susceptible to a near to intermediate term decline. Famed short-seller Jim Chanos mentioned as much at the Delivering Alpha conference yesterday. We had a buy/write position, a long position (in a longer term account) and a short position (in a short term trading account). We are closing out the first two positions and holding the short for the time being.
We looked at KO today. KO reported disappointed earnings yesterday as global growth slowed. KO is a good company for the long run but we would like to see the price drop. Based on historical parameters, we see the stock dropping to around $35 and would begin purchasing at $36.50. Given current information, we are setting a target price of $57.11 in 2017.
We have described in previous posts how to trade pairs. Today, we went short CHI and long CHY. Both are convertible bond closed-end funds run by Calamos. CHY is trading at a discount of about 7.3% and CHI is trading at a discount of about 1.4%. The difference is about 5.9% and the average difference (looking at monthly closes) over the last 2 years and a few months is about 3.3%. We entered our particular trade at a difference of 6.3%. We will aim to close the trade when the gap narrows.
See previous posts on pairs trading:
Warning: These are not guaranteed profitable trades. Please consult an investment advisory and understand the risks of these trades.