Pair Trade Update; Buying NASDAQ, Selling S&P 500

In July of this year there was a good opportunity to put on a critical pair trade or spread between the NASDAQ and the S&P 500. The trade simply called for buying the NASDAQ index and selling the S&P 500. However you chose to do it was up to you and your portfolio capacity.

The results so far have been very consistent with only  5 losing days out of 73 trading days. Currently, the trade would have returned 3.58% from July 1, 2011. That doesn't seem like a lot, but it is and the results were very consistent.

Looking at the chart below it looks like the best time to make the trade again if you haven't already is when the total return since July 1 goes below 2.5%. Typically, all else remaining equal, this is a good trade to put on when the market has reached a perceived bottom and due to the recent rally we have not reached a perceived bottom but should in due time. That's because the NASDAQ moves with a faster momentum and volatility than the S&P 500 so when times are good the NASDAQ is really good, but when times are bad it's also very bad

Notice on the chart below that the peak of the trade was at September 23, 2011 with a cumulative gain of 3.88% during that time bounced off a critical level and went up a little afterward. Also notice on the trough formed on August 19, 2011 with a cumulative gain of -0.84% the market touched off the same level and bounced up again from that critical point. So for the spread trade the return will peak and trough during very volatile times in the market.