Playing the Short Side on SPX
Now that I’ve refined my bull and sideways market strategies quite a bit, I need to start really thinking about what I need to do during bear markets or corrections. I’m going to consider bear market strategies on specifically equities and volatility. The nuances with a bear market are quite different compared to a bull and it’s even difficult to really spot whether we’re really in a market downturn or if it’s simply just a “secondary trend” that’s occurring and this means I really need to give Bear Market Investing Strategies by Harry Schultz a good read. However, one thing I do know about dealing with declining markets is that the old Buy and Hold mentality doesn’t work; there are times to go short and look at the big picture.
Some research areas for equities are:
- Incorporating the ETF USMV, which seeks to track the investment results of an index composed of U.S. equities that, in the aggregate, have lower volatility characteristics. I’m personally wary on whether this will hold up during actual crises, however, preliminary testing has shown that it actually has a negative correlation to SPY during slight market corrections. My consideration is to hold this when I’m out of SPY following simple momentum and stop loss parameters.
- Taking a long position in Market Inverse ETFs, specifically the ProShares Short S&P500 (SH), which is a 1X short of the S&P 500 index. There’s an interesting thread on Quantopian that’s been investigating this idea and it appears that using a Volumes metric worked very well.
Some research areas for long volatility are:
- Taking a long position in mid-term long VIX ETFs given a contango ratio. However, for these positions I believe it is crucial to incorporate a stop-loss parameter.
- Perhaps taking long positions in SPY options and this will actually require building an infrastructure in Quantconnect.
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