Spread Analysis (4/10/19)

SPREAD RATIO = Price of Stock X divided by Price of Stock Y

Spread analysis is useful when you have time series data for two stocks that you're trying to compare.

The stock on the numerator is the one you want to go long on (buy) and the stock on the denominator is the one you want
to short (sell).

In the above chart, I wanted to compare Gold and Silver and see my gold idea makes sense.

Over the past five months, the spread between gold and silver has moved between 82 and 86.

This means that while gold is clearly very attractive relative to silver, it's getting overbought relative to the spread.

Gold/Silver spread must break 86.00 to go kaboom.

In a long only market like the PH, this tool is useful too when you want to figure out which of your two buy ideas make
better sense.

Earlier on the +jiegoquants channel, I mentioned that #CPG makes better sense than #DD at this point @team.

As you can see on the chart, #DD did remarkable well between 2014 and 2016, but that since then the spread ratio
between the two has bottomed out and has increasingly been in favor of #CPG. Last October, #CPG spread broke 0.091
and has since ranged between 0.020 and 0.025. There's a good chance that CPG spread over DD will breakout higher this
year given the prevailing trend.
Finally, you're repeatedly heard me say that I prefer non-index names versus index ones.

I wanted to discuss this idea again, but this time within the context of the spread ratio.
You see, when the stock market bottomed out in 2009, the only way you could have made money was to buy index stocks.

If you didn't buy index stocks between 2009 and 2015, pinahirapan mo lang sarili mo.

Since 2016, the market has allowed non-index stocks to thrive with a brief pause for an index stock outperformance in
2017 before rotating back starting 2018 to non-index names again. Between 2018 and 2019, the spread ratio has been
betwee 0.60 and 0.62.

While it's very possible that non-index stocks are getting overbought relative to the spread (pwedeng untog eh), I'm hoping
it breaks out on this third try. For me, that's the only way the market moves higher at this point. Wala na tayong maasahan
masyado sa mga index stocks eh.

Either this time is different and non-index names continue to gain traction or mag top out na tayo now na.

It should be an exciting thing to watch. #QED

The same type of spread analysis can be applied to ETFs.

For example, cannabis and cyber securities are two sectors we've been super bullish on the past two quarters.

Using spread analysis, it's much easier to see how you should have been deploying your capital between these two sectors.
So between October and December, the correct strategy would have been to go long HACK / short HMMJ.

Tapos from January to March, go long HMMJ / short HACK.

And now we're entering a period again where it makes sense to go long HACK / short HMMJ @team 😊

Claro how to use spread analysis when comparing stocks, themes, and strategies, @team?

Langya, walang sumagot ah #LOL 😊

Ganito....

When we say price ratio, we're just comparing two numbers: The Numerator
(nasa itaas) and the Denomintor (nasa baba).

Pag tumataas ang numerator and you hold the denominator constant, that
means the ratio is going up.

2/1 = 2
3/1 = 3
4/1 = 4

Ratio is rising so you choose STOCK A over B.

But when it's the denominator that's going up and the numerator stays constant, it means the ratio is going down.

1/2 = 0.5
1/3 = 0.3333
1/4 = 0.25
Ratio is going down so you choose STOCK B over A.

When numerator is going up and and denominator is going down then the spread rises at a faster pace.

2/0.5 = 4
3/0.33 = 9
4/0.25 = 16

So in this situation, the ratio rises faster, so again you choose A over B. And vice versa.

The time series spread analysis helps us determine the faster pick between two comparable securities.

Spread analysis is similar to FX since there are two sides to the price.

https://bohsociety.ryver.com/#posts/1640529

#PGOLD / #COSCO spread ratio

At the bottom end of the range, you buy PGOLD, sell COSCO. At the top-end of the range, you do the reverse.

If spread ratio breaks out the upside, go long PGOLD, short COSCO (kung may shorting sa pinas). #LOL

Again, what you want to do is not just to compare any stock with each other.

What you want to do is to compare apples to apples or at the very least compare things that make sense.

Apples to apples means same sector or same Empire stocks?

It means compare what makes sense (to you).

For example... YTD you can see that AGI is the leader and BPI is the laggard @team. (Picture below)

Professional traders in a long/short market would have capitalized on this pair trade by being long AGI and short BPI.
You're not only benefiting from AGI's strength, but you'd also benefited from BPI's weakness.

Now, in an ideal world, professional traders would then want to catch AGI's top and sell, and bottom pick BPI.

So one way to time this is by looking at the spread ratio.

As you can see, the AGI/BPI spread broke out early this year. You can also see that may resistance around 0.24 area.

So you can take profits on AGI longs and rotate to BPI at that mark. And then range trade the two. Ang saya saya, diba? 😊
From 2017 to 2019, mas gusto ng mga pinoy ang pizza kesa manok @team.

Between mid 2018 and early 2019, stable ang choice between pizza and manok.

Paminsan gusto ng pizza, at the top-end mas gusto nila ang manok.
But then late March, biglang naging pabor ang manok sa pizza. Ang tanong is, will the spread ratio set up an under cut and
rally in favor of pizza over manok? O talaga bang nag switch na ang preference and manok will start to trend #LOL

Me, I'm inclined to think na fluke yung break down 😊 Mas madalas pa rin kami mag take out ng Shakey's kesa Max's #LOL

Even the SPYRSI isn't confirming the breakdown in the PIZZA/MAXS spread ratio. #QED

Anyway, spread analysis is super useful when generating trade ideas from the black box.

If you're using Amibroker, strongly suggest you use the SPREAD indicator and start studying up on it.

If you don't have a calculator, you only need to have the end of day prices for stocks you're trying to compare.

You can use any spreadsheet application to run the analysis and compute the price ratios.

Kahit investa, meron din spread indicator (just discovered). Denominator yong symbol na pipiliin.

Ang kinaganda rin ng spread ratio analysis is it keeps you from doing stupid things like buying laggards.

Paminsan kasi, when there are themes like the SC 72 teleserye where PXP was in place.Ang gagawin ng mga ginyus is to
buy APX instead of buying PXP directly #LOL

MORAL OF THE STORY:

Stop trying to be a ginyus. Don't trade indirect plays when you can buy exposure directly.

Sir @jetmojica that spread analysis is universal in nature across the financial markets like we can also do it in the FX
markets?

Basta may presyo, and price is recorded over time, you can do spread analysis.
I am thinking doing spread analysis say European currencies to the Asian currencies and the like. currency tied up to
commodities like CAD and Aussie and safe haven currency like JPY and USD. if oil goes up does CAD also goes up and if gold
goes up does Aussie does also mga ganun na scenario ang pumapasok sa isipan ko. kakapalan ko na mukha ko pwede po
sample naman dyan sa FX markets 😊

Yes, let's leave it at that. We'll leave it as kapal ng mukha mo 😊

Anyway, while CAD generally does well when oil prices are buoyant, this relationship is known to break down quite
frequently. Especially in light of some of the structural issues in Canada where growth has slowed dramatically for some
time now.

Same thing with the Australian dollar. While it should do well as price of gold goes up (AUD has been strengthening), but
why bother buying AUD and expose yourself to slowing Aussie growth when you can buy gold directly?

Same thing with oil, why buy CAD when bullish oil when you can buy oil directly? Wag mag paka ginyus.

Again, wouldn't you want to just buy XAUUSD than buy AUDUSD?

Basta, when given a choice to buy direct versus indirect exposure, always choose direct exposure.

Wag na mag patumpik tumpik pa. 😊

Wag nyo gamitin yung SPREAD sa Investagrams @team.

Instead of taking the ratio, ang ginagawa ng formula duon sa Investa is it takes the difference.

Pwede rin naman yun, but it doesn't control for the magnitude of the difference between two securities.

The conclusions will be very different when the price between two securities are large.
May Ratio na indicator na sir. 😊 You requested, @Shibidoo? Ah so RATIO instead of SPREAD. Cool 😊(4/11/19)

I’m sorry, is it just me o default na kinocompare ung price ng investa sa pse? Tinatry ko po kasi icompare ung prop sa fina
pero default ng PSE: Prop or Fina lng.

Editable sya, @niel_simon. Pull up PROP as the main chart. Ilabas ang indicator na Ratio. Piliin ang FINA.

In other words, spread of FINA/PROP tells us tigilan na ang pag trade ng mga bangko #LOL 😊
Sa spread analysis pala, ang laging nasa numerator ay yung gusto nyong bilihin, tapos denominator yung gusto nyo benta.

Mas intuitive if PROP/FINA @team. So go long property, short financials ang pair trade dito 😊

Like I've repeatedly said, if you want offense, go with property stocks; defense, industrials 😊

Are you starting to understand what spread analysis / trading is all about?

Do you see its usefulness in comparing two trading ideas? @team

SHORT #IMI ~ makes perfect of sense @team.

IMI/ALLSHARES spread ratio points to more downside risk as well.

Here's what I said about PIZZA/MAXS spread ratio last April 10, @team.
Updated spread ratio for PIZZA/MAXS confirms my view that the breakdown was a trap!

LONG PIZZA / SHORT MAXS should continue to make sense moving forward. Good luck this coming week, @team! 😊
#STI ~ I'd like us to start tracking STI for 3Q19 @team.

Must break above 0.74 to widen range. I expect more sideways action this June. Let's see what it does in July.

While the property sector should continue to do well, I prefer services because it has lower volatility and gives the same
level of momentum as properties @team.
But for services to outperform, its spread ratio versus the ALLSHARES Index must breakout!

As you can see, the spread ratio has been ranged bound since 2017, more prominently since 2018. Dasal dasal 😊

Here are components of the Services Index @team.

Sir Jet I have some questions (hopefully process related): (6/10/19)

1. For MAXS, wouldn’t this potentially be a HNS candidate? Given that the BBands are sloping down and a lower high
may be created?
2. (Referring to above) Is that why you say it makes sense to short it? Or is it because net-net we are still ok?

3. On the other hand, you mentioned how people preferred MAXS over PIZZA at the top end of the range of the spread
ratio. Does that mean we take some profits?
@John_BoH

1. If MAXS was a head and shoulders candidate, I would have said it. So, no, the risk isn't there.
2. Long PIZZA / SHORT MAXS is based on the view that the spread ratio is rising and will continue to rise in favor of
PIZZA.
3. How you trade long-short ideas will always be a choice between momentum and mean reversion.

If you believe that the spread ratio will remain ranged bound, you go long MAXS / short PIZZA at the top-end of the spread
ratio i.e. MEAN REVERSION.

If you believe that the spread ratio will finally breakout then long PIZZA / short MAXS will continue to make sense I.E.
MOMENTUM. As always, context and your view matter.