Thursday, November 15, 2012

The Gundlach Reversion/Hedge


Earlier this year, Jeffrey Gundlach presented a number of interesting contrarian pairs trades at the Ira Sohn conference. Six months out, they have done extremely well. Basically, they were mean reversion ideas on historic extremes. Short Apple - long natural gas. Long Spain - short the S&P. After this week, the short Apple / long natural gas wager (actually introduced at the end of April) is up almost 100%. The long Spain / short the S&P is up ~ 17%. Below is the latter Gundlach trade featuring Spain and the S&P.
With that said, those looking for a little protection in dipping their toes on the long side of US equities here, may want to consider hedging themselves initially with a short position in Spain. Why?
As I have pointed out over the past two years, silver has led turns lower in the euro and Spain. However, over the past week the gold miners have collapsed rather precipitously - in a manner similar to their leading moves of Spain's equity market and the euro this year. 
Should the US equity markets continue to slide - or worst; the US dollar is likely to strengthen quite considerably. In this event, I would expect Spain and Europe to lead once again on the downside. Below is a modified version of the Gundlach trade - which I suspect reverts, that substitutes the NDX for the SPX. Interestingly, it crosses flourishes of both pairs trades. 
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