On March 30th, I wrote about mean reversion as the bear market rally seemed quite extended.  I wasn't predicting where or when, just made an observation and maybe provided some perspective.  Yesterday's move made the 'normal' news.  You know the news I'm talking about where the commentators blame a single day move on the financial meltdown, Barack Obama, "the last 8 years", world hunger, Area 51, etc.  While the price on the DIA is actually a bit higher than when I last wrote of it, the movement has put us into 'normal' territory.  We're within one standard deviation of price movement over the last 21 days.  I also highlighted that the MACD has crossed over, which could indicate some further downside pressure.  I have a few dollars of fresh capital that I've been looking to introduce into the market.  Once we get into the lower green shaded area, I'll begin licking my chops.

(click to enlarge)

This has been one of my plans in the past when introducing new funds into the market.  It's not perfect, but I think it provides a slightly better entry point than random.   It's not for everyone and it's probably not the best there is either.  I will also use percentage points / index values as target entries as well especially when the market is going straight down.  This keeps me disciplined.

Woohoo, financials aren't the worst holding in my long term portfolio.  Not sure why I'm happy about this.  I suppose because it looked pretty bleak there for awhile. I did sell some puts on the XLF, so my actual cost basis is even better than I've recorded, but my current XLF cost basis for the shares is $14.00.  With today's close that puts them down a measly 22.5%.  Party time!  My worst performer now is PWY, which is small cap domestic value hold.  It is down 26.98%.  My cost basis is 13.49.  With financials getting all of the attention, you have to dig a little to find that value is also getting slaughtered and has been for some time.  This is a bit backwards in a "normal" market where value outpaces growth.  This started about the time of the inverted yield curve back in 06.

I expect the value funds to outperform growth over the next 5 years.  I also expect small cap to outperform large cap.  So a small cap value should be a high flier someday.  Today isn't that day.

A notable laggard in my long term holdings today, PBP.  I've written of PBP in the past, but to recap, it's a buy/write ETF for the S&P 500.  I own a bit of it in addition to BEP which is an S&P 500 buy/write CEF.  I own a bit more BEP than PBP because I loaded up when it was substantially below NAV during Oct and Nov of 2008. But back on point, both of those funds are notable laggards today.  Mostly because the market has run so far, so fast.  It's likely that the short calls are now in the money and moving close to 1.0 delta.  Bummer, right?  Maybe today, but let's look at the bigger picture.

Today's behavior could be considered 'expected' and it's hard to understand the beauty of this laggard until you look at a chart.  Oh, and I just happen to have one right here.

I was running through some tests in RightEdge today and had an interesting observation on the drawdown curve chart.

http://www.nypost.com/seven/04062009/news/regionalnews/lienny_dykstra_163150.htm

There's not much more to add from the title.  He chalked up his DITM call buying strategy to a leveraged stock portfolio.  Lenny apparently felt the stock market was a dangerous game so how could he ignore risk?

Lenny made it look easy when things were going up.  I don't necessarily disagree with his strategy, it has a time and place for some people, but he touted it as nearly fool proof.  He twisted the risk into "only the amount you paid for the call" which is 100% accurate.  However, the amount you pay for a DITM option is quite a lot. True, it is less than the stock itself, but it's highly unlikely that you're going to lose 100% of your money in a stock.  It is far more likely that you'd lose 100% of your capital in a DITM option.

I talk a lot about risk because to me it's far more fatal and doesn't get a lot of talk time in most circles.  I'm aggravated by people who down play it.

Back in August of last year I mentioned that the Dogs had fallen apart.  This was before the real "falling apart" had begun but it was clear at that point that the strategy wasn't holding up.  I speculated that picking the small dogs was simply a bet on volatility.  When bull markets are running high vol, low priced stocks of companies that are established will run further than the lower vol stocks.  Conversely, the lower vol stocks will sink less rapidly in lower markets.  Since the Dow mostly goes up, I'm not sure how much magic can be placed around the dog strategy.  You could just as easily bet on smaller cap, higher beta companies and get the desired effect.  My feeling on this seems to have an ounce of merit.  As we've been progressing through this bear market rally, the small dogs are outperforming the broader Dow index.  Not to sound like a broken record, but this makes sense.  Higher vol stocks tend to extend further faster in either direction.

This observation though might have some merit for new money.  If you've stumbled on some new found cash, it may make sense to consider the dogs after underperforming quarters or years and consume defensive, higher cap, lower vol stocks during less turbulent times.  This is counter to most advice where defense is recommended after the decline is well under way.

I consider the dogs strategy a crude but interesting trading system.  This is why I revisit it from time to time.  The more I observe it though, the more I believe there is really nothing new here, just a volatlity play under the guise of an edge.