You may have noticed a new widget on the side bar of the blog: a market neutral trade notification list. I’ve been reviewing the market neutral trades I entered this year (some of which I’ve recapped below recently), learning from my mistakes, and making notes to refine my technique. In a secular bear market, market neutral investing appears to be superior to long-only or short-only investing, so I intend to start putting some cash to work in market neutral trades, using Short Screen and other tools to identify long and short candidates. My plan is to e-mail the details of my next market neutral trade to those who subscribe to the notification list the night before I place the trade. That way, you can place the trade at the same time I do.
Please note that I won’t be offering any investment advice in my e-mails — just telling you what I plan to do in my own account the next day. By subscribing to the e-mail list, you’ll be acknowledging that, and also agreeing that you’ll do your own due diligence and use your own common sense before making any investment decisions.
A quick note about terminology: There appear to be two different definitions of pairs trades. Investopedia offers the more general definition, which describes what I’ve been doing, “matching a long position with a short position in two stocks of the same sector.” Wikipedia offers a narrower definition, essentially, a bet on a convergence in the market performance of two similar securities that have recently diverged. That’s not what I’m looking to do. I’m not looking to buy Coke and short Pepsi (or vice-versa) if shares of the two companies deviate from their historical trading pattern. I’m looking to buy a solid stock and short a weaker stock in the same industry (or in similar industries). Hence, my use of the term “market neutral” here, for disambiguation purposes, despite its two extra syllables.
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